The effects of firm and facility characteristics on environmental compliance

Abstract

This study examines the relationship between firm and facility characteristics and environmental compliance rates. A framework to help analyze this relationship is provided by deterrence theory which suggests that given the same level of government monitoring and enforcement, facilities with higher compliance costs will have lower compliance rates. The literature implies that firms and facilities with certain characteristics face higher costs to ensure compliance with regulations. For example, it has been proposed that plants that are part of large firms, multi-facility firms, or publicly traded firms will incur higher agency costs monitoring employees to make sure they are complying with regulations. Similarly, it is thought that large facilities and facilities located in a different state than the firm’s headquarters will also face higher agency costs. In addition, it is suggested that foreign-owned plants will confront higher costs developing the expertise to comply with domestic regulations. Understanding the nature of these costs and how they relate to firm and facility characteristics could assist policymakers with developing more targeted environmental compliance strategies. The current study uses data collected on a sample of chemical facilities to analyze whether these characteristics affect facility violation rates, as measured by compliance with air permits. The results suggest that plants with more employees and plants that are part of multi-facility firms are more likely to be out of compliance. Plants that are part of firms with out-of- state headquarters were unexpectedly found to have lower violation rates. None of the other firm and facility characteristics were found to be significant predictors of facility violation rates.