This study investigates the impact of formal and informal regulations on environmental
and economic performance of Brazilian manufacturing firms. We adopt a dual approach
where production technology is represented by a cost function, approximated by a translog
form. Pollution is considered as a negative by-product that can be modified trough using
either formal regulation (inspections or sanctions) or informal regulation (community pressure).
A simultaneous equation model is estimated by three-state least squares on a sample
of 404 industrial establishments located in the state of Sao Paulo, Brazil. We show that pollution
abatement costs for the Brazilian manufacturing sector are different from zero which
suggests that pollution emissions are affected by environmental regulation. We also demonstrate
that environmental performance of firms is jointly affected by formal and informal
regulation. Lastly, formal regulation is largely influenced by informal regulation and more
specifically by community pressure.