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A Note on Organizational Design and the Optimal Allocation of Environmental Liability

Frans de Vries () and Laurent Franckx ()

No 2012-09, Stirling Economics Discussion Papers from University of Stirling, Division of Economics

Abstract: A multi task principal-agent model is employed to derive optimal environmental liability rules for risk neutral managers under two alternative organizational structures - a functional organization and a product-based organization. For a product-based organization it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages. In a functional organization it is optimal either to hold the firm liable for environmental damages or, equivalently, not to hold the production managers liable for environmental damages. We derive conditions to obtain the first-best solution for a given organizational structure. Finally, the organizational form that induces the highest environmental effort induces the lowest production effort and vice versa. This suggests that production and environmental protection are substitutes rather than c omplements.

Keywords: contracts; vicarious liability; multi-task; principal-agent; organizat ions (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-cta, nep-env, nep-hrm and nep-res
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Handle: RePEc:stl:stledp:2012-09