Environmental enforcement federalism

Abstract This paper studies whether environmental enforcement powers should be assigned to central or regional authorities. We develop a two-stage model in which authorities choose inspection intensities under imperfect monitoring, then firms determine emissions and compliance behaviour. We show that centralized enforcement is generally more stringent unless there is a high level of heterogeneity across regions or authorities. Although decentralized enforcement may yield higher welfare when regional heterogeneity in inspection effectiveness is sufficiently large, moving from centralization to decentralization is not a Pareto improvement. We further show that when regional governments place relatively low weight on environmental quality, central and local authorities disagree over the preferred enforcement structure, generating potential intergovernmental conflict within environmental federalism.