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Modelling the choice between regulation and liability in terms of social welfare

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  • Marcel Boyer
  • Donatella Porrini

Abstract

Using a formal political economy model with asymmetric information, we illustrate the conditions under which an environmental protection system based on extending liability to private financiers is welfare superior, inferior, or equivalent to a system based on an incentive regulatory scheme subject to capture by the regulatees. We explicitly consider the following factors: the cost of care and its efficiency in reducing the probability of an environmental accident, the social cost of public funds, the net profitability of the risky activities, the level of damages, and the regulatory capture bias. We characterize in such a parameter space the regions where one system dominates the other

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 3 (August)
Pages: 590-612

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Handle: RePEc:cje:issued:v:37:y:2004:i:3:p:590-612

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References

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  1. Hahn, Robert W, 1990. " The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
  2. Marcel Boyer & Tracy Lewis & Wei Lin Liu, 1996. "Setting Standards for Credible Compliance and Law Enforcement," CIRANO Working Papers 96s-27, CIRANO.
  3. Heyes, Anthony G, 1996. "Lender Penalty for Environmental Damage and the Equilibrium Cost of Capital," Economica, London School of Economics and Political Science, vol. 63(250), pages 311-23, May.
  4. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  5. Peter S. Menell, 1991. "The Limitations of Legal Institutions for Addressing Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 93-113, Summer.
  6. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
  7. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers 299, Cowles Foundation for Research in Economics, Yale University.
  8. HIRIART Yolande & MARTIMORT David, 2006. "The Benefits of Extended Liability," LERNA Working Papers 06.28.221, LERNA, University of Toulouse.
  9. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  10. Marcel Boyer & Jean-Jacques Laffont, 1999. "Toward a Political Theory of the Emergence of Environmental Incentive Regulation," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 137-157, Spring.
  11. Robert W. Hahn, 1993. "Comparing Environmental Markets with Standards," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 346-54, May.
  12. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
  13. Tiller, Emerson H & Spiller, Pablo T, 1999. "Strategic Instruments: Legal Structure and Political Games in Administrative Law," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 349-77, July.
  14. Marcel Boyer & Jean-Jacques Laffont, 1994. "Environmental Risks and Bank Liability," CIRANO Working Papers 94s-22, CIRANO.
  15. Lewis, Tracy R. & Sappington, David E. M., 1999. "Using decoupling and deep pockets to mitigate judgment-proof problems1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 275-293, June.
  16. Pfaff, Alexander S P & Sanchirico, Chris William, 2000. "Environmental Self-Auditing: Setting the Proper Incentives for Discovery and Correction of Environmental Harm," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(1), pages 189-208, April.
  17. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
  18. Tracy R. Lewis & David E. M. Sappington, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 724-730, June.
  19. Marcel Boyer & Jean-Jacques Laffont, 1995. "Environmental Protection, Producer Insolvency and Lender Liability," CIRANO Working Papers 95s-50, CIRANO.
  20. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 232-58, April.
  21. Marcel Boyer & Donatella Porrini, 2000. "Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy," CIRANO Working Papers 2000s-57, CIRANO.
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