A note on organizational structure and environmental liability

Laurent Franckx, Frans P. Vries () and Ben White
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Frans P. Vries: University of Stirling Management School
Ben White: University of Western Australia

Environmental Economics and Policy Studies, 2022, vol. 24, issue 2, No 3, 173-193

Abstract: Abstract This paper employs a multi-task principal-agent model to examine how a corporation’s organizational structure and liability rules for environmental damages affect the incentive schemes offered to managers. We derive environmental liability rules for risk averse managers under two alternative organizational structures: a product-based organization (PBO) and functional-based organization (FBO). For a PBO, it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages; in a FBO it is optimal either to hold the firm liable for environmental damages or, equivalently, to only hold the environmental managers liable for damages. It is also shown that the two organizational structures are equally efficient when there is no correlation between environmental damages from products and no spillover between managerial effort across products or functions. Numerical results further reveal that beneficial spillovers between functions for the same product favours a PBO over a FBO; beneficial spillovers across functions favours a FBO.

Keywords: Contracts; Multi-task; Principal-agent; Environmental compliance; Environmental liability; Governance framework (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10018-021-00318-6

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