Compliance, environmental regulation, and quota markets

Market-based instruments are widely promoted for their efficiency in achieving environmental goals, but their effectiveness depends on enforcement and compliance, which are often imperfect. We develop a theoretical model in which agents face both technological standards and quota regulations, with the possibility of non-compliance with both at the risk of fines. Within this model, we investigate how intrinsic motivation to comply with different regulations affects investment behavior in quota markets. We find that a greater willingness to invest in quotas can result from either a strong intrinsic motivation to comply with quota regulations or a weak motivation to comply with technological standards. To test these predictions, we use survey data and incentivized economic experiments with Norwegian fishers. The empirical results confirm the theory predictions: Fishers who find technological violations less acceptable tend to invest less in quotas, while those who disapprove of quota violations tend to buy more quotas. These findings highlight the critical role of compliance attitudes for quota market behavior and offer insights for designing more efficient environmental regulations.