Political Connections and Selective EPA Enforcement

Abstract

We examine whether the Environmental Protection Agency (EPA) uniformly enforces the Clean Air Act for politically connected and unconnected firms using a close election setting from 1980-2010. The regression discontinuity design framework allows us to causally compare the outcomes of firms connected to politicians who just won a close election to those connected to politicians who just lost a close election. Following the literature, we consider a firm to be politically connected if a firm’s political action committee (PAC) donates to a politician. While the EPA has considerable discretion in launching investigations and enforcement actions pertaining to the Clean Air Act, we find no difference in investigations between firms with and without political connections. However, politically connected firms are less likely to be subject to EPA enforcement actions, and conditional on enforcement, they receive smaller penalties, suggesting that regulation is not uniformly enforced for politically connected firms. These results are more pronounced for firms connected to politicians capable of influencing regulatory bureaucrats, such as incumbents, members of the majority party, party leaders, and politicians with high seniority. We also find similar results for politicians serving on committees closely related to the EPA through oversight, funding, or committee responsibilities. Previous theory models of regulation show that politicians are generally assumed to maximize their probability of re-election by catering to their constituencies and optimizing political contributions. In line with this literature, we examine whether firms that are most likely to help politicians maintain office experience more favorable EPA regulation. We find that this is true for firms that are local to the politician, located in important state industries, and are large campaign contributors. In subsequent analysis, we show that our results are robust to the cleaner special election setting and that plants with politically connected parent firms do not emit more toxic gasses than those with parent firms lacking connections. Taken together, our results show that campaign contributions can indirectly benefit firms by way of reduced environmental regulatory enforcement and fines.