Abstract
Quotas are frequently used in the management of renewable resources and emissions. However, in many industries there is concern about their basic effectiveness due to non-compliance. We develop an enforcement model of a quota-regulated resource and focus on a situation with significant non-compliance and exogenous constraints on fines and enforcement budget. We propose a new enforcement system based on self-reporting of excess extraction and explicit differentiation of inspection rates depending on compliance history. We use differentiated inspections to induce firms to self-report excess extraction. This system increases the effectiveness of the quota by allowing the regulator to implement a wider range of aggregate extraction targets than under traditional enforcement, while ensuring an efficient allocation of extraction. In addition, inspection costs can be reduced without reductions in welfare.
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