Pollution Permit Market: Using Incentive Contracts to Reduce Dominant Firm Inefficiencies

Sonia Schwartz

Economics Bulletin, 2010, vol. 30, issue 4, 3201-3208

Abstract: Incentive contracts can be proposed to a dominant firm that has been excluded from the pollution permit market. We determine the optimal characteristics of a contract considering the trade-off between market efficiency and the cost of public funds. We show that under incomplete information the firm always buys fewer quotas than under complete information. We conclude this study by giving a concrete rule to implement such a contract.

Keywords: pollution quotas; incentive contract. (search for similar items in EconPapers)
JEL-codes: D8 Q5 (search for similar items in EconPapers)
Date: 2010-12-02
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