Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments

25 Pages Posted: 18 Apr 2016

See all articles by Susanne Goldlücke

Susanne Goldlücke

University of Mannheim

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

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

JEL Classification: D23, D62, D82, D86, H23

Suggested Citation

Goldlücke, Susanne and Schmitz, Patrick W., Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments (April 2016). CEPR Discussion Paper No. DP11217. Available at SSRN: https://ssrn.com/abstract=2766545

Susanne Goldlücke (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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