Enforcement costs and regulatory reform: The agency and firm response

Influenced by models of optimal law enforcement, several authors have recently revised the work on efficient levels of regulatory control to accommodate the realities of underenforcement and imperfect compliance. However, most of these efforts have centered on either the enforcement agency or the firm and have largely ignored the decentralized nature of the enforcement process. This paper extends these results by modelling both the firm and the local agency and by incorporating detection uncertainty and concealment activity. Each model is then evaluated with respect to the alternative regulatory regimes of direct controls and emission taxes.