Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System

The literature on noncompliant firms in transferable emissions permit systems offers little guidance to policymakers that must determine how to commit resources to monitor firms and punish violations in such systems. We consider how a budget-constrained enforcement authority that seeks to minimize aggregate noncompliance in a transferable emissions permit system should allocate its monitoring and enforcement efforts among heterogeneous firms. With a conventional model of firm behavior in a transferable permit system, we find that differences in the allocation of monitoring and enforcement effort between any two types of firms should be independent of differences in their exogenous characteristics.