Institutional Design For Environmental Acts

Louise Guillouet and David Martimort
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Louise Guillouet: IFC - International Finance Corporation

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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.

Keywords: Environmental Risk; Tipping Point; Uncertainty; Irreversibility (search for similar items in EconPapers)
Date: 2026-02-02
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Journal Article: Institutional Design for Environmental Acts (2026)
Working Paper: Institutional Design For Environmental Acts (2026)
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