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Abate, bribe or quit: firms’ decision in the presence of environmental regulation, informality and corruption

Published online by Cambridge University Press:  06 October 2025

Sarbajit Sengupta  and
Amit K. Biswas Open the ORCID record for Amit K. Biswas [Opens in a new window]
Sarbajit Sengupta
Affiliation:
Department of Economics and Politics, Visva-Bharati University, Santiniketan, WB, India
Amit K. Biswas*
Affiliation:
Department of Economics and Politics, Visva-Bharati University, Santiniketan, WB, India
*
Corresponding author: Amit K. Biswas; Email: amitkumar.biswas@visva-bharati.ac.in
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Abstract

Public authorities often enforce pollution abatement through monitoring and penalties. However, monitoring is costly and only a small percentage of firms are monitored. Inspectors may be corrupt and permit evasion for a bribe. For firms in developing countries, it is expensive to enter formally and install costly abatement technologies, which are accessible only to formal firms. This paper studies a framework where firms, depending on abatement cost, the probability of inspection, the likelihood of a corrupt inspector and the bribe, choose whether to organize formally or informally and whether to abate before inspection. Firms that do not abate beforehand are liable to either pay a penalty and abate or close down post-inspection. Greater monitoring and lower abatement costs encourage firms to move towards formal organization, while excessively high penalties may discourage entry.

Keywords

abatement costbribecorruptionenvironmental regulationinformal sector

JEL classification

Q58: Government Policy K42: Illegal Behavior and the Enforcement of Law L23: Organization of Production K23: Regulated Industries and Administrative Law Q52: Pollution Control Adoption and Costs • Distributional Effects • Employment Effects

Information

Type
Research Article
Information
Environment and Development Economics , First View , pp. 1 - 21
Copyright
© The Author(s), 2025. Published by Cambridge University Press.

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