1. Introduction There is a growing consensus among policymakers that command-and-control environmental regulation stifles efficiency and innovation by requiring heterogeneous plants to adopt similar abatement strategies. While market-based instruments such as tradable permits and emissions fees address this problem, there are a variety of political and economic barriers to their immediate and widespread application. As a result, the last decade has witnessed a number of efforts to modify existing regulations to give individual plants more control over pollution abatement. Chief among these efforts at limited reform is Project XL, the flagship of the Environmental Protection Agency's (EPA) reinvention initiative. Participating plants are allowed to develop pollution control strategies that or modify specific on the condition that these strategies improve their environmental performance (Federal Register 1995). In essence, Project XL defines voluntary site-specific performance standards that are more stringent than the de facto standards implied by current regulation and gives plants regulatory flexibility to meet these standards in unconventional ways. Blackman and Mazurek (2001) provide detailed descriptions of the first eight XL projects to be implemented. Half of these projects involve replacing complex technology standards that require a plant to obtain new air permits whenever its production process changes with a single plantwide emissions cap that leaves the plant free to reconfigure its production and abatement process as long as total emissions do not exceed a predetermined limit. The plants implementing these four XL projects are in sectors where production processes change continuously and existing technology standards and permit requirements are particularly costly.1 Project XL has had a troubled history, in large part because of administrative problems at the EPA (Caballero 1998). Nevertheless, it will almost certainly emerge as a prototype for similar efforts. President Clinton touted it as a regulatory blueprint for the future, a characterization that has pervaded analysis of the project (Phillips 1995).2 Such characterizations appear increasingly credible. In the last several years, a number of influential policy reports have called upon Congress to replace command-and-control regulation with a performance-based system (National Academy of Public Administration 1997, 2000; Enterprise for the Environment 1998). Toward that end, the Second Generation of Environmental Improvement Act has been introduced in Congress to provide the legislative underpinnings for a broad-based Project XL-like program (Inside EPA Weekly Report 1999; Inside EPA's Environmental Policy Alert 2001b). Recent pronouncements by Bush administration environmental officials affirm the continued importance of Project XL and similar initiatives (Inside EPA's Environmental Policy Alert 2001a; Whitman 2001).3 A number of such programs have already been adopted at the state level (Larsen 1998; Inside EPA's Environmental Policy Alert 2000). All of these programs-which we refer to as tailored regulation (TR) programs-have common characteristics that we have alluded to above: They are voluntary (i.e., plants choose whether or not to participate), they entail a shift away from technology and process standards and toward more flexible performance standards, and they require participating plants to demonstrate superior environmental performance.4 In addition, TR programs have two characteristics we have not yet touched upon. First, they require firms to pay a fixed cost to participate. This cost is for negotiating a performance standard with regulators, developing monitoring procedures, and (in some cases) investing in new types of pollution control equipment. For example, Blackman and Mazurek (2001) found that the average fixed cost of putting Project XL agreements in place is approximately $325,000 per firm, not counting the costs of new pollution control equipment. …