Delegating Pollution Permits

Abstract

We discuss the decision to delegate the regulation of pollution through sales of permits to a
biased expert in a situation where the polluting firm has private information about its technology.
We consider, in particular, constrained delegation where the government puts restrictions on the
amount of pollution that the expert can sell permits for. We find that there is, in general, more
delegation the higher is the probability of the firm being low-cost. This is not in line with the
so-called uncertainty principle, which states that there is more delegation the more uncertainty
the government faces.

Keywords: Bureauracy; Delegation; Pollution standards; Permits

JEL Classification: D82, H23, L51, Q58