Bankruptcy Risk and Imperfectly Enforced Emissions Taxes
23 Pages Posted: 22 Feb 2009
Date Written: July 25, 2008
Abstract
Under favorable but reasonable conditions, an imperfectly enforced emissions tax produces the efficient allocation of individual emissions control; aggregate emissions are independent of whether enforcement of the tax is sufficient to induce the full compliance of firms, and differences in individual violations are independent of firm-level differences. All of these desirable characteristics disappear when some firms under an emissions tax risk bankruptcy - the allocation of emissions control is inefficient, imperfect enforcement causes higher aggregate emissions, and financially insecure firms choose higher violations.
Keywords: Bankruptcy, Emissions Taxes, Limited Liability
JEL Classification: L51, Q28, Q58
Suggested Citation: Suggested Citation