Improve Compliance with Limited Resources by a Three-Group Inspection Regime

Frequent monitoring and relatively high fines are usually necessary to bring about improvements in environmental quality, but more challenging for many countries with limited human, material, and financial resources is to put them into practice. This paper developed a three-group model of a state-dependent enforcement in a repeated game to improve the policy implementation under limited inspection capacities. A certain number of firms are grouped (group 1, group 2, group 3) for different supervision intensity (e.g., the order of inspection probability corresponding to each group is p ₁?<?p ₂?<?p ₃) based on their environmental performance. The optimal policy parameters, such as inspection probability of each group and the probability that a firm found in compliance is moved to a better reputation group, were obtained as the basis for regulator’s policy making. Numerical simulations indicated that the three-group inspection regime can significantly increase compliance rate as compared with static enforcement with the same monitoring probability. Among the number of firms in each group under steady state conditions, group 2 had the most, group 1 was the second, and group 3 had the smallest. Analysis and prediction of a three-group reputation example provided a good experiment for the model. The results give a practical reference for the policy makers with inspection capacity constraints to achieve higher compliance rate.