Standard Setting with Incomplete Enforcement Revisited

Abstract

Many regulatory agencies enforcing quality standards across diverse populations of firms lack sufficient resources to promote full compliance. Based on a model with lump-sum noncompliance penalties, W. Kip Viscusi and Richard J. Zeckhauser have advocated that, in most circumstances, an agency with insufficient enforcement resources should choose a less stringent standard than it would choose if it could induce full compliance. I show that the recommendation for regulatory restraint depends upon the shape of the penalty function. A review of inspection and penalty policies suggests that U.S. administrative law encompasses a diversity of variable expected penalty policies. The inspection and penalty policies employed in recent environmental statutes suggest, however, that agencies should compensate for insufficient resources by increasing the stringency of standards.