Optimal Regulation of Private Production Contracts with Environmental Externalities

Philippe Bontems, Pierre Dubois and Tomislav Vukina

Journal of Regulatory Economics, 2004, vol. 26, issue 3, 287-301

Abstract: We address the problem of optimal regulation of an industry where the production of a polluting output is contracted with independent agents. The provision of inputs is divided between the principal and the agent such that the production externality results from their joint actions. The main result shows that in the three-tier hierarchy (regulator-firm-agent) involving a double-sided moral hazard, the equivalence across regulatory schemes generally obtains. The only task for the regulator is to determine the optimal total fiscal revenue in each state of nature because any sharing of the regulatory burden between the firm and the agent generates the same solution. The equivalence principle is upset only when the effects of regulation on the endogenous organizational choices are explicitly taken into account. Copyright Kluwer Academic Publishers 2004

Keywords: regulation; pollution; principal–agent relationship; moral hazard (search for similar items in EconPapers)
Date: 2004
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Working Paper: Optimal regulation of private production contracts with environmental externalities (2004)
Working Paper: Optimal Regulation of Private Production Contracts with Environmental Externalities (2003)
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DOI: 10.1007/s11149-004-7552-5

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