This paper extends the economic literature on the incomplete enforcement of social regulation by incorporating regulatory choice in an institutional environment of limited regulatory resources and powers. We show how regulatory decisions determine the structure of incentives faced by regulated firms. Our results indicate that the expense of monitoring relative to the regulator's power to levy penalties helps to explain the differences between 'compliance* and "deterrence' enforcement styles. We find that in most circumstances firms with higher abatement costs will receive a larger share of regulatory resources and thus face higher penalties than firms with lower costs. * The author would like to acknowledge financial support for this research from the Principal's Advisory Research Committee at Queen's University, Kingston, Canada.We would like to thank Anthony Fisher, Michael Hanemann, Mitch Renkow, Suzanne Scotchmer and Roger Ware for useful comments.

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