Quota Enforcement in Resource Industries: Self-Reporting and Differentiated Inspections

Abstract

Quotas or permits are frequently used in the management of renewable resources and emissions. However, in many industries there is concern about the basic eectiveness of quotas due to non-compliance. We develop an enforcement model of a quota-regulated resource and focus on a situation with signicant non-compliance and exogenous constraints on nes and enforcement budget. We propose a new enforcement system based on self-reporting of excess extraction and explicit dierentiation of inspection rates based on compliance history. In particular, we use state-dependent enforcement to induce rms to self-report excess extraction. We show that such system increases the eectiveness of quota management by allowing the regulator to implement a wider range of aggregate extraction targets than under traditional enforcement, while ensuring an ecient allocation of aggregate extraction. In addition, inspection costs can be reduced without reductions in welfare.Enforcement, Non-compliance, Self-reporting, Dierentiated inspections, Quotas, Emissions standards, Resource Management