Delegating Pollution Permits
23 Pages Posted: 4 May 2020
Date Written: December 2, 2020
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 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 less uncertainty the government faces. This means that the delegation of the sale of pollution permits works differently from that of other tasks considered in the delegation literature. We also find that delegation may imply a distortion in the low-cost firm's pollution level, which makes regulation through delegation different from other ways of regulation under asymmetric information.
Keywords: Bureauracy; Delegation; Pollution standards; Permits
JEL Classification: D82, H23, L51, Q58
Suggested Citation: Suggested Citation