The Effects of Enforcement on Corporate Environmental Performance: The Role of Perceived Fairness

Abstract Several empirical studies explore the effects of regulatory enforcement on environmental behavior and performance. Within this literature, extremely little empirical research examines the role of fairness, which we interpret broadly to include multiple dimensions, e. g. similar treatment of similarly situated regulated entities. Our study empirically examines the effect of perceived enforcement fairness on the extent of compliance with wastewater limits imposed on chemical manufacturing facilities regulated under the Clean Water Act. Our study also explores the influence of perceived fairness on the effectiveness of enforcement efforts – government inspections and enforcement actions – at inducing better compliance. For our analysis, we use a subjective measure of the degree of “fair treatment” of regulated facilities by environmental regulators, as perceived by facilities and reported as survey responses. Results reveal that a more (perceived) fair enforcement approach raises compliance, but only under limited enforcement conditions; in most instances, perceived more fair enforcement lowers compliance. As important, results show that greater perceived fairness improves the effectiveness of federal inspections and informal enforcement, but undermines the effectiveness of state inspections and formal non-penalty enforcement.