Environmental Policy Regulation and Corporate Compliance in a Spatial Evolutionary Game Model

TL;DR

This paper models the interaction between corporate environmental compliance and enforcement using a spatial evolutionary game, revealing conditions under which a country can escape pollution traps or face ineffective auditing.

Contribution

It introduces a spatial network model to analyze how inspection costs influence long-term compliance and pollution levels, highlighting the importance of spatial structure in environmental policy outcomes.

Findings

Spatial structure can stabilize compliance and help escape pollution traps.

High inspection costs lead to ineffective enforcement and loss of compliant firms.

Oscillatory dynamics occur in well-mixed models without long-term equilibrium.

Abstract

We use an evolutionary game model to study the interplay between corporate environmental compliance and enforcement promoted by the policy maker in a country facing a pollution trap, i.e., a scenario in which the vast majority of firms do not internalize their pollution negative externality and auditors do not inspect firms. The game conflict is due to the trade-off in which firms are better-off when they pollute and are not inspected, while social welfare is maximized when auditors do not need to inspect socially responsible corporations that account for pollution in their production decisions regarding technology used and emission level. Starting with a well-mixed two-population game model, there is no long-run equilibrium and the shares of polluters and shirking auditors keep oscillating over time. In contrast, when firms and auditors are allocated in a spatial network, the game displays a rich dynamics depending on the inspecting cost. While the oscillatory behaviour is still possible, there is a set of parameters for which a long run robust equilibrium is achieved with the country leaving the pollution trap. On the other hand, an excessively high inspection cost leads to an ineffective auditing process where the few compliant firms are driven out of the country.