More Stick, Less Carrot: Rethinking How to Enforce Rules

For regulators with dwindling enforcement resources, convincing businesses to comply with rules is only becoming more challenging. Yet, regulators still have options.

Harvard Business School Professor Michael Toffel and fellow researchers teamed with the US (EPA) to test which messages about lead-paint violation penalties increased compliance among California contractors. The article “Sending a Message: An Empirical Assessment of Responses to Punitive and Non-punitive Compliance Messaging Strategies” finds that the threat of the stick is more powerful than the reward of the carrot, challenging conventional wisdom on cooperative enforcement strategies.

In partnership with the EPA’s Region IX office, the researchers tracked some 20,000 enforcement letters sent under the agency’s Renovation, Repair, and Painting Rule (RRP). The rule, issued in 2008, requires renovation contractors working on buildings built before 1978 to be EPA Lead-Safe-Certified. The researchers find that a carefully crafted message emphasizing the risk of inspection or certification checks yielded nearly twice as many certifications as the least effective letter, even when the probability of being caught remains low.

The findings challenge conventional wisdom and offer a cost-effective tool for agencies operating under resource constraints, say the authors. “When you bring up threats of penalties together with the heightened possibility of inspection, all of a sudden, some people take it more seriously,” says Toffel, the Senator John Heinz Professor of Environmental Management.

He coauthored the paper, forthcoming in the journal Ecology Law Quarterly, with Jodi L. Short, the Mary Kay Kane Distinguished Professor of Law at UC Law, San Francisco; Elizabeth A. Keenan, a professor at Dartmouth College’s Tuck School of Business; and Melissa Ouellet, a data scientist at the University of Potsdam’s Hasso Plattner Institute in Germany.

When agencies and academics partner

The challenges to enforcement are significant. Estimates suggest that there are over half-a-million remodeling businesses in the United States, but the agency inspects less than 0.5% of them annually. The renovation contractor market ranges from publicly traded multinational companies to day laborers, making it difficult to create an enforcement strategy that reaches everyone.

The EPA’s California enforcement team turned to Short to help design a field experiment that would test several alternative enforcement letters to California contractors to determine which version was most effective in prompting the contractors to get certified. Short put together the team of researchers, including Toffel, to help craft four different messages.

Four kinds of letters for 20,000 contractors

A sample list of 20,000 contractors who ultimately received letters was culled from almost 185,000 names in the California Department of Consumer Affairs’ Contractors State License Board database and EPA data that included expired certifications.

Mailed in January and February of 2023, letters fell into four categories. Each letter was sent to 5,000 contractors; an additional 5,000 contractors who served as the control group received no letter.

All four versions of the letter provided information about the program, including potential penalty amounts and compliance assistance resources. The Informational (baseline) letter stopped there, and the other three letters added additional messaging as described above. It turns out that the prospect of getting caught proved to be more effective than an information notice that included the threat of fines, a plea on moral grounds, or a carrot-based approach that dangled inclusion on a list of certified contractors recommended by .

“It’s the probability that you'll be detected, the possibility that you'll get caught, that gained traction,” Short says. “That seemed to be enough to move the needle for some contractors.”

Deterrence is a powerful tool

Another important finding: the deterrence letter was most successful with never-before-certified contractors—boosting compliance by about 50%. For that group, 3.3% of letter recipients got certified, whereas the informational letter yielded 2.2% new certifications. Interestingly, the positive incentives letter was much less effective, prompting only 1.5% of the never-before-certified contractors to get certified.

Contractors whose certification had expired responded best to the informational letter, with 10% re-upping certification. The deterrence letter was close behind at 9.6%. “It's an important insight that you can actually do worse than simply providing information. That’s a little counterintuitive,” Short notes.

The “moral” incentive letter, for instance, which led to certification by only 7.6% of the expirees who received it, may have resulted in a backlash, the authors write.

“Maybe it's so obvious that contractors were offended when they got a letter that said ‘you have to protect the children.’ And they may have thought ‘Duh, that's what I'm doing.’ It's hard to know just from the data that we have, because we did not talk to individual contractors about their reactions to the letters” Short says. “We can only speculate. But it does suggest that using moral messaging, particularly for things that might be morally obvious, can backfire.”

Implications for regulators

Even when regulatory enforcement resources are tight, the mere perception of heightened enforcement can be effective, the authors suggest. Contractors who know that enforcement probability is low may have been lulled into thinking they’d fallen off the agency’s radar, the authors write, perhaps producing an “outsized deterrent effect” when they learned that they are visible to the regulator.

Regulators may want to consider pairing with researchers to design the best wording for similar enforcement letters. In the EPA’s case, the agency got many contractors to follow the lead-safe rule with little cost, and running the experiment cost very little as the agency was already planning to send letters.

Experiments can help regulators be more productive in achieving their goals, Toffel says, “as much as 50% more, in this research project.” While such approaches don’t require academic support, a researcher’s insight can’t hurt.

“We're going to do research anyway,” Toffel says. “Many of us aim to do research that can have real-world impact, such as helping managers craft more effective messages. This research project enables regulators to get more out of whatever amount of resources they have to invest in enforcement and inspection actions.”

Image credit: Ariana Cohen-Halberstam