Institutional Design for Environmental Acts

Louise Guillouet and David Martimort

AEA Papers and Proceedings, 2026, vol. 116, 538-543

Abstract: Environmental decisions often involve irreversibility and uncertainty. We develop a dynamic model in which actions yield flow benefits, but, once an unknown tipping point is crossed, the accumulated stock of past actions raises the risk of irreversible catastrophe. Because constitutions are incomplete contracts, contingent policies cannot be fully specified, and authority is delegated to decision-makers who observe the current stock but hold biased beliefs, decreasing welfare. Such delegation is thus costly. Imposing caps on early actions can limit discretion and improve welfare, providing foundations for the precautionary principle as a second-best institution.

JEL-codes: D02 D82 E02 Q54 Q58 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/pandp.20261066

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