Jerry Min, "Nationality Bias in Regulatory Enforcement"
Politicians attract foreign investors by promising fair regulatory standards and, in race-to-the-bottom competition for capital, often favorable ones. Yet such commitments can become time-inconsistent when enforcement of those standards proves unfair to investors, effectively constituting non-tariff barriers to trade and investment. Does regulatory enforcement discriminate in favor of or against foreign-owned firms and, if so, why? I argue that enforcement bias favoring foreign-owned firms does not necessarily reflect a regulatory race to the bottom, while bias against them does not necessarily demonstrate protectionism. Observed nationality bias can reflect either intentional discrimination arising from strategic motives or statistical discrimination resulting from regulators' enforcement decisions under limited capacity and imperfect information about foreign-owned firms. The key testable implication that distinguishes these two forms of bias is that statistical bias should manifest at the first stage of enforcement---the targeting of monitoring efforts---rather than in final corrective or punitive actions per documented violation. Moreover, local regulators' statistical bias toward foreign-owned firms may extend to non-local firms more generally. I test this theory in the context of US environmental regulation by linking administrative records covering the full enforcement process to business registration data. I find substantial bias against foreign-owned firms, with patterns consistent with the statistical discrimination interpretation.