Panel Paper: Principal Moral Hazard, Public Awareness, and Environmental Regulatory Biases

Friday, November 8, 2019
Plaza Building: Lobby Level, Director's Row J (Sheraton Denver Downtown)

*Names in bold indicate Presenter

Tingjia Chen, The University of Arizona and Edella Schlager, University of Arizona

Traditional principal-agent theory plays a predominant role in examining enforcement and compliance in regulatory settings. Organizational control, especially reducing agent’s drift while increasing their compliance, is the key research theme. However, in practice, principal moral hazard and credible commitment could generate more damage to the efficiency of governance than the agent’s moral hazard (Miller, 1992, 2005; Schillemans & Busuioc, 2015). In a regulatory setting, this principal moral hazard is characterized by biased regulation, which is defined as over- and under-enforcement in this study.
Miller and Whitford (2016) have proposed that keeping bureaucratic independent and “above politics” would be a potential solution for the principal moral hazard issue. However, it may not be a feasible or realistic solution for many policy areas and countries. This study examines whether information disclosure and increasing public awareness can be a solution of principal moral hazard with lower cost and can be compatible with diverse institutional environment. In specific, the study answers the following two questions: (1) how do public awareness and information disclosure affect regulators’ behavior? (2) Would it to some extent correct the distorted regulatory behavior?
Targeting on environmental regulation in China, this study argues that public awareness would not only affect enforcement intensity but also change the way of regulatory bias as well. The research uses China as the study context, not only because environmental pollution is highly salient for both Chinese governments and citizens, but is also based on important theoretical considerations. First, previous case studies have shown that biased environmental enforcement and selective sanctions are not uncommon in China, so it is an ideal context to study the principal’s moral hazard issue. Second, since the solution of placing bureaucracy “above politics” proposed by Miller and Whitford is not realistic and compatible with the Chinese political system, this study would provide valuable information on whether public awareness can be an effective instrument to improve the efficiency of governance and regulation.
In conducting Difference-in-Difference (DID) analysis, our findings show that increased public awareness on air issues stimulates the Chinese government to increase air enforcement intensity and thus remedy previous slack enforcement on air, compared to the control group of water enforcement. At the same time, under-enforcement on air pollution has been reduced. However, the probability of over-enforcement on air issues has also been increased. Thus, the Chinese Ministry of Environmental Protection over-punishes some of the local governments in order to send strong signal to the public about its commitment in improving air quality. Enforcement remains biased, with under-enforcement giving way to over-enforcement. Although it is possible that this over-enforcement is more appropriate to incentivize better environmental performance in a short term, the bias in the regulatory process may damage this incentive and offset the positive effects of the enforcement in the long run.