Abstract:-
We show that firms strategically reduce their compliance effort when regulatory stringency unexpectedly declines in the short run. We analyze daily air emissions from coal-fired power plants in the United States, using the Environmental Protection Agency’s furlough during the 2018-2019 federal government shutdown as a natural experiment. Using an engineering-based approach we confirm that coal-fired power plants increased daily particulate matter emissions during the furlough of Federal employees by temporarily reducing end-of-pipe pollution control. At the same time, consistent with our expectations, there is no detectable increase in daily emissions of SO2 and NOX during the furlough, because they are continuously monitored and the furlough did not represent a change in regulation stringency for these pollutants.