This paper quantifies the benefits of discretion in the enforcement of environmental regulations. We identify and estimate a structural model of regulator-discharger interactions, exploiting an increase in the enforcement stringency of water pollution regulations in California. Our estimates indicate that most of the heterogeneity in punishments for observably similar violations is due to heterogeneity in discharger compliance costs rather than heterogeneity in regulator preferences. We find that removing the discretion of regulators to tailor punishments to discharger attributes would raise enforcement costs and decrease compliance by dischargers with high social harms of violations.

We develop and estimate a structural model of arbitration, accounting for asymmetric risk attitudes and learning. Using data on public sector wage disputes in New Jersey, we compare the efficiency of two popular arbitration formats: final offer and conventional. We find that although conventional arbitration hinders the transmission of case-relevant information from the disputants to the arbitrator, this format outperforms final offer arbitration by affording discretion to select awards. We also assess how risk attitude differences between the disputants affect imbalances in arbitration outcomes, finding that risk aversion weakens a party?s position in the dispute despite making them more likely to win arbitration.

We examine the objective function of the SEC against financial misconduct by estimating a structural model of the interactions between the SEC and a regulated firm. The SEC considers social costs, enforcement costs, and firms' compliance costs when making enforcement decisions. Identification exploits SOX as a shock to enforcement intensity. Four insights emerge from counterfactual analyses. First, marginal social costs have a greater impact on the SEC's perceived welfare than marginal enforcement costs. Second, the SEC's current enforcement mitigates earnings management to a level close to the first-best scenario. Third, a “hawkish” regulator, who perceives high social costs of financial misconduct, would impose excessive costs on society. Lastly, removing regulatory discretion would result in higher penalties and lower welfare, with little effect on earnings management.