What happens when governments regulate other governments? Leading theories of regulation proceed from the assumption that governments regulate profit-maximizing firms: governments set regulations pursuant to policy objectives, to which firms respond rationally in ways that constrain their behavior. But in many significant cases (e.g., pollution control, occupational safety), the entities that governments regulate are other government agencies, not for-profit firms. The typical policy instruments that regulators use to channel firm behavior (e.g., fines and licensure) may be ineffective or counterproductive when governments regulate other governments. Moreover, the regulator and regulated may share basic policy objectives and be ultimately responsible to the same citizens.

This paper advances a theory of regulation that accounts for the choices of regulators and regulated entities when both are governments. We argue that government agencies have greater incentives than profit-maximizing firms to shirk regulation and/or seek regulatory relief through political channels. As a test of this theory, we analyze public and private entities’ compliance with three U.S. pollution control laws: the Clean Air Act, the Safe Drinking Water Act, and the Resource Conservation and Recovery Act.  Analysis of data covering the period of 2000-2010 indicates evidence consistent with our argument.