Optimal Control of Upstream Pollution under Asymmetric Information

Rudolf Kerschbamer and Nina Maderner

Environmental & Resource Economics, 2001, vol. 19, issue 4, 343-360

Abstract: This paper derives optimal bribes to reduce upstream transfrontieremissions in the presence of asymmetric information on the polluter'sconcern for the environment. In a model in which the starting point forthe negotiations on emission reduction is a Cournot-Nash equilibrium, itis shown that transfers from the victim induce the polluting country toexaggerate its concern for the environment. As a consequence, in thesecond best solution, abatement of all but the least caring type isdistorted downward and optimal bribes may be such that more caring typesturn them down. These results are in sharp contrast to earlier policyproposals derived for a non-equilibrium starting point. They indicatethat under asymmetric information the binding incentive problem is toprevent the polluting country from claiming not to care about theenvironment and that optimal bribes from the victim should be restrictedto sufficiently environmentally concerned polluters. Copyright Kluwer Academic Publishers 2001

Keywords: asymmetric information; downstream pollution; transboundary emissions; type-dependent reservation utility (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1023/A:1011679630804

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