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Menus of price-quantity contracts for inducing the truth in environmental regulation

Ratna K. Shrestha

Journal of Environmental Economics and Management, 2017, vol. 83, issue C, 1-7

Abstract: Many authors have proposed mechanisms to induce regulated polluting firms to truthfully reveal their private information. This paper proposes an alternative scheme in which the regulator offers each firm a menu of linear price-quantity contracts; faced with this menu, each firm′s dominant strategy is to truthfully report its private information and self-select the contract that is ex post efficient. The proposed menu schedule that is more elastic than the firm′s residual marginal damage function engenders a positive quantity effect, thereby counterbalancing the firm′s incentive to misreport prompted by the linearity of price. Due to its built-in price quantity structure, the scheme performs as designed regardless of the elasticities of marginal damage and demand functions.

Keywords: Menus; Dominant strategy; Residual damage; Pecuniary externality (search for similar items in EconPapers)
JEL-codes: D82 H23 L51 Q58 (search for similar items in EconPapers)
Date: 2017
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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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