Abstract
Competitive endogenous audit mechanisms may help budget-constrained regulatory agencies to improve compliance with regulations. Under these mechanisms, the probability of an audit depends on relative comparisons among peers, with agencies directing resources towards those entities the agencies believe to be less compliant than other similar regulated entities. Despite their theoretical advantages, no previous empirical study explores whether any agency implements these mechanisms. We provide this evidence by examining the inspection strategies of U.S. Environmental Protection Agency (EPA) regional offices and state agencies charged with enforcing Clean Water Act discharge limits imposed on chemical manufacturing facilities. We find that federal inspectors appear to use competitive endogenous audit mechanisms involving relative evaluation but state inspectors apparently do not. Our empirical study represents the first necessary step for demonstrating that use of competitive endogenous audit mechanisms improves compliance in practice.
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