Regulatory Compliance and Air Quality Permitting: Why Do Firms Overcomply?

Abstract

Industry overcompliance with pollution standards has puzzled economists, leading to a variety of hypotheses about the objectives companies expect to achieve by doing so. This article examines the possibility of overcompliance with a different type of environmental regulation: the papenvork requirements for completing a federal Title V air operating permit application. We suggest that unique political circumstances set the stage for companies to overcomply with their Title V permit application requirements, including tremendous regulatory uncertainty, stiff penalties for intentional corporate noncompliance, and consultants who allegedly were eager to capitalize on both circumstances to sell their services. This regulatory context led us to hypothesize that corporate Title V overcompliance was driven by four factors: a complying organization's internal control processes and red tape; its permitting experience; the quality and quantity of contact with state regulators; and whether the company subcontracted its compliance-related activities. To test the influence of these factors, we analyzed survey data from more than five hundred companies in four states. The results indicate that, while internal red tape and permit inexperience were insignificant cost influences, both the increased contact with regulators and the use of consultants corresponded with higher Title V costs and, by extension, the probability of overcompliance. In contrast to expectations, the presence of regulated facilities in other states was associated with significantly higher Title V costs, perhaps due to inflationary effects of cross-state permit coordination. While caution is warranted in interpretation, the results spark the possibility that communicating extensively with regulators and subcontracting compliance tasks-particularly under conditions of regulatory uncertainty and high perceived noncompliance risks - may lead companies to overly expansive compliance with permit processes.