Game-Theoretic Analyses of Enforcement of Environmental Regulations with Self-Reporting Systems

Abstract

Formal game-theoretic models are developed to study systematically the self-reporting systems that indus-trial and other enterprises are often required to implement to demonstrate their compliance to environmental regulations. Two specific systems are modeled and analyzed in detail using extensive form games. The first self-reporting system includes strict liability, whereby an operator is liable for injurious discharges, but can use defenses if it can demonstrate that reasonable care was taken to prevent discharges in violation of envi-ronmental standards. The second extensive game models of absolute liability system, in which the operator is solely responsible for violations, no matter how they were caused. Comparison of Nash equilibria for a range of values of model parameters indicates when self-reporting systems are truly effective, and suggests the circumstances under which a strict liability system, or an absolute liability system, is preferable.