A note on relative violation arguments in expected penalty functions for permit noncompliance

Abstract

Models of firm noncompliance under imperfectly enforced standards and permit regimes normally include a level violation argument in the firm's expected penalty function, analogous to the constraint term in a Lagrangian function. This article suggests that a relative violation argument may be more appropriate in many cases and demonstrates how this can change our predictions about firm behaviour under permit regimes.

Notes

¹ It will be apparent, however, that even under a standard (i.e. z fixed) the first-order condition for x∗ becomes scale-dependant with a relative violation argument.