Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments

27 Pages Posted: 24 Aug 2019

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: 2018

Abstract

A principal's production decision imposes a negative externality on an agent. The principal may be a pollution-generating firm, the agent may be a nearby town. The principal offers a contract to the agent, who has the right to be free of pollution. Then the agent privately learns the disutility of pollution. Finally, a production level and a transfer payment are implemented. Suppose there is an upper bound (possibly zero) on payments that the agent can make to the principal. In the second-best solution, there is underproduction for low cost types, while there is overproduction for high cost types. In contrast to standard adverse selection models of pollution claim settlements, there may thus be too much pollution compared to the first-best solution.

Keywords: Coasian contracting, negative externalities, hidden information, limited liability, overproduction

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

Suggested Citation

Goldlücke, Susanne and Schmitz, Patrick W., Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments (2018). European Economic Review, Vol. 110, 2018, pp. 211-222. Available at SSRN: https://ssrn.com/abstract=3439057

Susanne Goldlücke

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Patrick W. Schmitz (Contact Author)

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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