In this study, we empirically examine the effectiveness of regulatory actions on wastewater treatment plants in Illinois with careful attention to endogeneity issues that might have caused biased estimates in previous studies. We show that Pooled OLS and Fixed Effect models, which are the dominant estimation strategies in the literature, underestimate the effect of regulatory activities, giving rise to misleading conclusions on the effectiveness of regulatory activities. For example, in this particular application, Pooled OLS and Fixed Effects suggest that non-monetary sanctions "increase" emission levels and monetary sanctions have no deterrence effect. On the contrary, GMM suggests that non-monetary sanctions have no deterrence effect whereas monetary sanctions do have a deterrence effect. This suggests that reconsideration of the deterrence effect of regulatory activities may be worthwhile in other similar applications.
