Weak Enforcement of Environmental Policies: A Tale of Limited Commitment and Limited Fines

When a firm undertakes activities which are risky for the environment, the conflict between social and private incentives to exercise safety care requires imposing fines in case a damage occurs. Introducing asymmetric information on the firm's wealth, we show that the fines and probabilities of investigation are systematically too low compared to their optimal level under complete information. This effect is exacerbated when the public agency in charge can no longer commit to an investigation strategy. Compounding asymmetric information with a government failure provides a possible explanation of the significant trend in practice towards a weak enforcement of environmental policies.*