Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines

Ben White

Journal of Regulatory Economics, 2015, vol. 48, issue 1, 26-52

Abstract: Using a Pigovian tax to provide incentives for mine rehabilitation may be ineffective if limited liability, (judgement-proof) firms can declare themselves bankrupt to avoid the tax and rehabilitation costs. This paper introduces a model of environmental policy for mining that accounts for bankruptcy risk, profit risk, and a mobilization cost that applies if, following bankruptcy, rehabilitation is funded by the regulator or investor. The results show that making deep-pocketed investors who are never judgement-proof liable for a share of rehabilitation cost is optimal. The share of extended liability depends on the policy setting, control rights over the firm and the firm’s rent. If the firm has control rights over bankruptcy, optimal liability is at least the full cost of rehabilitation. If the investor has control rights then optimal liability is partial. Partial liability also applies when the policy is based on an insurance contract. Mobilization costs for a regulator to engage in rehabilitation mean it is socially optimal for an investor to “prop-up” a firm making moderate losses to complete mine rehabilitation. Copyright Springer Science+Business Media New York 2015

Keywords: Mining; Non-renewable resources; Limited liability; Environmental bonds; Bankruptcy; Q58 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s11149-015-9276-0

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