CNCC Thrust Research Seminar - Loss Target: Randomized Environmental Inspections and Law Enforcement Efficiency

Random inspection is considered a law enforcement mechanism that can decrease the likelihood of collusion between supervisors and supervised objects. However, random inspection restricts the use of information advantages, which may compromise the effectiveness of law enforcement. Using over 160,000 inspection records from 2016 to 2019, this study examined how China’s implementation of randomized environmental inspections affect law enforcement efficiency. We find that random inspections reduce enforcement efficiency, as measured by the likelihood of rendering an illegal judgment on examined firms. Random inspections discover 11% fewer environmental problems and 5% fewer environmental penalties than non-random inspections. However, random inspections are more effective when the likelihood of collusion is high. Specifically, random inspections work better on large firms and in regions with low transparency than on small firms and in regions with high transparency. To develop more efficient law enforcement strategies, policymakers must evaluate the benefit of preventing collusion against the lower informational value of random inspection.