If a firm can contest the enforcement of an environmental regulation, then neither increasing the probability nor severity of the fine will guarantee a reduction in the illegal dumping of waste. The only policy that unambiguously decreases illegal dumping is lowering the price at legal dump sites because increasing the probability or severity triggers investment into a legal war chest to challenge the fine, while a decrease in the costs of legal dumping does not. If the regulator can only imperfectly monitor a firm's behavior so the firm can be accused of another firm's behavior, then strategic commitment to challenge enforcement will lead to overinvestment in the legal war chest, an increased fraction of illegal dumping, and an overall increase in total costs relative to the nonstrategic case.
This working paper was published as Nowell, Clifford and Jason Shogren, "Challenging the enforcement of environmental regulation," Journal of Regulatory Economics 6 (1994): 265–282, doi:10.1007/BF01064655.
Nowell, Clifford and Shogren, Jason F., "Challenging the Enforcement of Environmental Regulation" (1991). CARD Working Papers. 118.