Environmental policy as a multi-task principal-agent problem (original) (raw)

Environmental policy under imperfect information: Incentives and moral hazard

Journal of Environmental Economics and Management, 1991

When net emissions of individual polluters cannot be efficiently monitored, then emissions charges, controls on emissions levels, or subsidies for emissions reduction are not effective as environmental policy instruments. This paper proposes instruments that can hc applied in such limited information situations. These instruments take the form of contracts between a pollution control agency and individual polluters. The contracts include a comhination of fines and subsidies that induces dischargers to follow optimal environmental policies in the absence of individual monitoring. 'C" IYYI Acaclem,c Prc,,. I"'

On multiple-principal multiple-agent models of moral hazard

2007

In multiple-principal multiple-agent models of moral hazard, we provide sufficient conditions for the outcomes of pure-strategy equilibria in direct mechanisms to be preserved when principals can offer indirect communication schemes. The conditions include strong robustness in the direct mechanism game, as developed in the literature on competing mechanisms by Peters and , and a no-correlation property we define. We provide a rationale for restricting attention to take-it or leave-it offers, as is typically done in applications. We show via examples that it is necessary to allow direct mechanisms to be stochastic and to include private recommendations from principals to agents to preserve the corresponding equilibrium outcomes, and that the no-correlation condition is tight.

Environmental risk regulation and liability under adverse selection and moral hazard

This paper analyzes the impact of risk regulation and extended liability on private contracting when production creates an environmental risk on third-parties. We start by deriving the optimal regulation of a buyer-seller (principal-agent) relationship under adverse selection on the seller's production costs, moral hazard on his safety care and limited liability. This optimal regulation must trade off allocative efficiency against rent extraction in a framework where the firm is rewarded only with moral hazard rent. As a result, the optimal regulation induces some form of complementarity between care and output, even in the absence of any technological interaction. Output distortions are stronger when there is no limit on liability. This optimal regulation can sometimes be implemented with a simple ex post liability rule, provided that the buyer has enough wealth. When liability is extended towards a shallow-pocket buyer, the optimal contract between the buyer and the seller must also avoid any accident to secure gains from trade. Optimal contracts in the extended liability regime are quite comparable with those in the optimal regulation and still exhibit a complementarity between outputs and levels of care even though output distortions are now severe.

Dynamic moral hazard and optimal regulation of non point source pollution

2014

Non point sources of pollution such as agriculture produce diffuse emissions which are unmeasurable, arise from unobservable actions and cause stochastic pollution of air and waterways. Despite the significant damage they cause, regulation of these sources has proven far from straightforward in both theory and practice. To ensure tractability, theoretical treatments remain either static or focus on determining the optimal level of pollution. In contrast, we specify a rich model of firm incentives in a dynamic setting. Specifically, using the continuous time methods pioneered by Sannikov (2008) we treat (multiple) firms as having limited liability and outside options. We model a regulator who must design an incentive compatible contract to implement abatement and show that the solution is a simple incentive mechanism. The regulator collects a constant tax and links a firms’ promised payoff to the flow of pollution. A firm is paid a rebate once this promised payoff exceeds their socia...

The optimal principal-agent model for the CO 2 allowance allocation under asymmetric information

2014

In this paper, the carbon allowance allocation is studied from the perspectives of government and the whole society under the lens of contract theory. It investigates the principle problem under asymmetric information, in which the government (as a principal) is not able to observe the emission rate of the firm (as an agent). A principal-agent model of different scenarios is developed with an aim to maximize the government's expected social welfare. The results show that the allocated allowances and CO 2 emissions are low when asymmetric information is considered. This indicates that offering different contracts to different reported emission rate is beneficial to the environment whereas most allowances will be wasted when private information is omitted. In addition, the proposed principal-agent model provides a useful illustration of how the allowance is allocated to the firm and how to define the contract combining allowance allocation rate with emission reduction in a bid to reduce the environmental damage. Moreover, the sensitivity analysis shows that higher carbon price leads to lower allowance allocation rate and emission reductions under complete information than incomplete information. The variation of allocation rate and the coefficient of emission abatement cost indicate a similar trend

Group rewards and individual sanctions in environmental policy

2007

We examine an incentive scheme for a group of agents, where all agents are rewarded if the group meets its target. If the group does not meet its target, only the agents that meet their individual target are rewarded. In environmental policy, the EU burden sharing agreement and the UK Climate Change Agreements feature this incentive scheme. There is only a difference in outcome between group and individual rewards if emissions are stochastic. Group rewards generally lead to higher expected emissions than individual rewards. The attraction of the group reward scheme may lie in its fairness and its toughlooking targets.

On multiple agent models of moral hazard

2006

In multiple principal, multiple agent models of moral hazard, we provide conditions under which the outcomes of equilibria in direct mechanisms are preserved when principals can offer indirect communication schemes. We discuss the role of random allocations and recommendations and relate the result to the existing literature.

Fairness and Incentives in a Multi-task Principal-Agent Model

Scandinavian Journal of Economics, 2004

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

A Note on Organizational Design and the Optimal Allocation of Environmental Liability

A multi-task principal-agent model is employed to derive optimal environmental liability rules for risk neutral managers under two alternative organizational structures: a functional organization and a product-based organization. For a product-based organization it is shown that e¢ ciency is independent of whether the …rm or managers are liable for environmental damages. In a functional organization it is optimal either to hold the …rm liable for environmental damages or, equivalently, not to hold the production managers liable for environmental damages. We derive conditions to obtain the …rstbest solution for a given organizational structure. Finally, the organizational form that induces the highest environmental e¤ort induces the lowest production e¤ort and vice versa. This suggests that production and environmental protection are substitutes rather than complements.