The Political economy of monitoring and enforcement in the coal mining industry
R.J. Briggs, Penn State University, phone: +1 814 836 1640, email:
Anastasia V. Shcherbakova, Penn State University, phone: +1 814 865 9136, email:
Suman Gautam, Penn State University, phone: +1 814 863 4545, email:
Overview
In a society where citizens expect equal protection before the law, lobbying and campaign contributions should not influence regulatory outcomes. The aftermath of the Upper Big Branch (UBB) mine accident suggests otherwise. According to the West Virginia Governor’s Independent Investigation Panel (GIIP), while UBB clearly fit the definition of a “flagrant” violator, the U.S. Mining Safety and Health Administration (MSHA) never cited the mine as such (GIIP 2010, pps 78, 81). Among several other reasons, the GIIP concluded that UBB operator’s (Massey Energy) political connections, political contributions,and rising industry lobbying expenditures were a factor. These findings raise a troubling question: with respect to the effect of political activity on monitoring and enforcement, wasMassey Energy, the exception or the rule?
While most prior research finds that political connections have little value in developed economies (e.g. Jones and Olken 2005; Fisman et al. 2006), recent papers suggest that the effect of corporate lobbying may be non-trivial (Drope and Hansen 2006, Brasher and Lowery 2006, Kim 2008). Kim (2008) shows that lobbying is more prevalent in regulated industries, and that firms that lobby “tend to outperform the market average and, to a lesser degree, the average peer in the same industry”.
Lobbying may contribute to profits through several mechanisms. With the round rejection of the Porter Hypothesis (e.g. Jaffe and Palmer 1995), lobbying may simply represent the efforts of firms to fight the imposition of costly regulations. Gordon and Hafer (2005) suggest a second, indirect mechanism: political expenditures may signal a firm’s “willingness to fight an agency’s specific determinations in the political arena”, leading to an equilibrium where large donors violate more and are inspected less. Arguably, firms may similarly “flex their muscles” through lobbying by raising the costs for an agency to perform its functions.
The purpose of this paper is to investigate the relationship between lobbying contributions and monitoring and enforcement outcomes in the coal mining industry. This paper makes at least three contributions to prior literature. To our knowledge, this analysis is the first to examine the impacts of lobbying on regulatory outcomes. We also believe it is the first empirical examination of monitoring and enforcement through the lens of political economy. Finally, while other papers investigate the MSHA data (e.g. Grayson and Kinilakodi 2011), we believe we offer the first separate identification of inspection and violation in this area.
Methods
We combine inspections and violations data for coal mines from MSHA with lobbying expenditure data from the Center for Responsive Politics (CRP), focusing on the lobbying activities of mine operators. Our main analysis extends the approach of Shimshack and Ward (2005) in examining what effect, if any, lobbying expenditures have on coal mine violation and fine outcomes.
We have five main outcomes of interest: propensity to receive violation citations, number of such citations received during the course of the year, the size of the originally imposed fine, the probability of securing a fine reduction, and the size of fine adjustments. We begin with a base set of controls on lobbying expenditure and expandthe set gradually to include regulator inspection activities, mine- and county-level characteristics, and controller-level fixed effects. To correct for potential endogeneity between lobbying and inspections,we use regional inspection rates as an instrument for own inspections. To control for non-random selection into violation, the Heckman two-step method is applied to models of aggregate violations and fines. We conduct several robustness checks, varying the error structure and sample structure over our preferred model.
We are still working on finding an appropriate instrument for lobbying expenditures, as they are also likely to not be independent of inspections. This comprises the main limitation of our current estimation procedure.
Results
Results suggest that lobbying expenditures may indeed be linkedto coal mine health and safety regulation breaches. On one hand, mines whose controllers donate funds to industry lobbying groups experience higher probabilities of being cited with a violation and accrue a larger number of violations relative to mines whose controllers do not make such contributions. The same effect is observed in mines that are subject to increased inspection activities. These two findings suggest that controllers who actively lobby tend to behave less accountably with respect to industry health and safety regulations.
Higher rates of inspection, which may signal an increase in the amount of resources available to a regulator,are also linked to a higher probability of receiving a citation and larger initial fines. This suggests that violation detection mechanisms may be improving as resource constraints ease or, alternatively, that some targeting begins to take place.
On the other hand, an increase in controller’slobbying expenditures is associated with a decline in the number of mine-accrued citations, and there is some evidence that contributing funds to industry lobbying groups may be related to lower fines. The probability of achieving a fine reduction is, in turn, positively influenced by higher aggregate industry lobbying expenditures, but not by an individual controller’s contribution.
Conclusions
An increase in serious mining accidents since the turn of the century points to a significant challenge in today’s energy industry. As coal mining companies compete to provide consumers with cheap source of energy, theysometimes choose to evadeimportant but costly safety procedures, sometimes leading to loss of human life. Several pieces of legislature introduced recently, including the MINER Act of 2006 and the Miner Safety and Health Act of 2010, aim to address this problem bytightening safety and health regulations and their enforcement. Evidence from the coal mining industry, however, suggest that the true problem may lie not in the strength of regulations per se, but rather in corporations’ growing bargaining power and theirability to influence the regulatory process through financial means.
References
Becker, G.S. (1968). “Crime and punishment: An economic approach,” Journal of Political Economy 76 (2), 169-217.
Brasher, H. and D. Lowery (2006). “The Corporate Context of Lobbying Activity,” Business and Politics 8(1), Article 1.
Drope, J.M., and Hansen, W.L. (2006). “Does firm size Matter” Analyzing business lobbying in the United States,” Business and Politics 8(2), Article 4.
Faccio, M. (2006). “Politically Connected Firms,” American Economic Review 96(1), pp. 369-386, March.
Fisman, D., Fisman, R., Galef, J., and Khurana, R. (2006). “Estimating the value of connections to Vice-President Cheney,” working paper, Columbia University.
Jones, B.F. and Olken, B.A.(2005). “Do Leaders Matter? National Leadership and Growth Since World War II,” Quarterly Journal of Economics 120 (3), pp. 835-864, August.
Jorgenson, D.W. and P.J. Wilcoxen (1990). “Environmental Regulation and U.S. Economic Growth,” Rand Journal of Economics 21, 2, pp. 314-340.
Kim, J-H. (2008). “Corporate Lobbying Revisited,” Business and Politics 10, 2, Article 3.
Porter, M.E. (1990). The Competitive Advantage of Nations, Macmillian: London.
Porter, M.E. (1991). “America’s Green Strategy,” Scientific American (April). Reprinted as Chapter 3 in Business and the Environment Eds. R. Welford and R. Starkey), 1996, Earthscan Publications Ltd., London.
Shimshack, Jay P., Ward, M. B. (2005). “Regulator Reputation, Enforcement, and Environmental Compliance,” Journal of Environmental Economics and Management 50 (3), pp. 519-540.