The ‘Gorilla in the Closet’: Regulatory Enforcement Under Federalism (with Romaine Campbell)
How does federal regulatory capacity affect state enforcement outcomes? We provide a model in which a stronger federal regulatory agency can either strengthen or weaken states’ negotiating position with their regulated entities. The optimal federal enforcement for the states is one that maximizes state-level negotiated penalties. We apply the model’s insights in the context of environmental regulation to test whether the US Environmental Protection Agency (EPA) is too strong or too lenient in two environmental programs: the Clean Air Act and Superfund. First, using an EPA database of state-issued penalties, we show that when EPA’s budget was cut in 2011, state-issued penalties for Clean Air Act violations shrank by 15%. Second, using a dataset with information about environmental remediation projects under state jurisdiction, we show that firms are more likely to begin cleanup projects during Democratic federal administrations. Our remediation analysis identifies the mechanism: while firm cleanup behavior is affected by EPA strength, cleanups conducted by the state are not, providing evidence that the effects operate through firm-state bargaining. We conclude that over one third of EPA’s effect on environmental penalties is through its spillovers to state enforcement outcomes, and that states would benefit from a stronger EPA.