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Environmental regulations often require that polluting agents comply with certain norms, which range from the installation of adequate pollution control devices in the initial stages of their production process, to the requirement that they do not exceed the recommended pollution limits or standards while engaging in their production activities. Normally, authorities may not observe the performance of firms with respect to such laws, particularly, whether they comply or not with the pollution limits, unless they engage in costly inspection processes. Therefore, together with the determination of standards, regulators design monitoring policies, which depend not only on their costs but also on the standards to be enforced. These policies basically consist of frequencies of inspection to verify firms' behavior, and sanctions to be imposed if firms are found to be violating the standards. 1 However, even when such enforcement policies are specified, in reality we observe that some firms comply with and others violate environmental laws.

In this paper, we investigate the aspects which may explain why some firms do comply with the pollution standards and others do not. For that purpose, we consider a model in which the regulator sets a policy consisting of a pollution standard and a probability of inspection. If a firm is discovered to be noncompliant with the standard, then it is forced to pay a sanction, which is strictly increasing and convex in the degree of violation. 2