A three-player model is established in order to examine the effects ofenvironmental policy instruments, budget control, and bribery on thedecision-makings of the local government, the firm, and the centralgovernment. The model incorporates several important factors such as ahierarchical government, a firm's evasive behaviors (includingemission violation, concealment, and bribery), mixed policyinstruments (tax and penalties), and enforcement (effort and quality).An increase in the emission tax rate might result in more taxes beingreported and less tax evasion under incomplete enforcement. Briberycan cause over-enforcement as well as under-enforcement efforts.Bribery might even promote enforcement efforts especially when theenforcer's 'legal' revenues are independent of his enforcementquality. An increase in the local revenue-sharing and tax and penaltyrates will promote the local government's enforcement effort andquality and thus maybe the bribes, too. However, a stricter emissionstandard enhances the enforcement effort and the violation probabilityand thus may lower the quality of enforcement. The distortion(inefficiency) from bribery can be at least partially offset throughthe revenue-sharing system and/or performance-based incentive scheme.
