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Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments

Susanne Goldlücke and Patrick Schmitz

No 11217, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A pollution-generating firm (the principal) can offer a contract to an agent (say, a nearby town) who has the right to be free of pollution. Subsequently, the agent privately learns the disutility caused by pollution. Then a production level and a payment from the principal to the agent are implemented as contractually specified. We explore the implications of a non-negativity constraint on the payment. For low cost types there is underproduction, while for high cost types there is overproduction. Hence, there may be too much pollution compared to the first-best solution (which is in contrast to standard adverse selection models).

Keywords: Coasean bargaining; externalities; hidden information; incentive contracting; limited liability (search for similar items in EconPapers)
JEL-codes: D23 D62 D82 D86 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-env and nep-mic
Date: 2016-04
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Related works:
Journal Article: Pollution claim settlements reconsidered: Hidden information and bounded payments (2018) Downloads
Working Paper: Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments (2018) Downloads
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