Risk Aversion and Compliance in Markets for Pollution Control

John Stranlund ()

No 2006-2, Working Papers from University of Massachusetts Amherst, Department of Resource Economics

Abstract: This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm’s decision to be compliant or not is independent of its manager’s risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers’ utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.

Keywords: Emissions Trading; Compliance; Enforcement; Risk Aversion (search for similar items in EconPapers)
JEL-codes: L51 Q28 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2006-09
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Risk Aversion and Compliance in Markets for Pollution Control (2006)
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