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Optimal Control of Upstream Pollution under Asymmetric Information

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  • Rudolf Kerschbamer

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  • Nina Maderner
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    Abstract

    This paper derives optimal bribes to reduce upstream transfrontieremissions in the presence of asymmetric information on the polluter'sconcern for the environment. In a model in which the starting point forthe negotiations on emission reduction is a Cournot-Nash equilibrium, itis shown that transfers from the victim induce the polluting country toexaggerate its concern for the environment. As a consequence, in thesecond best solution, abatement of all but the least caring type isdistorted downward and optimal bribes may be such that more caring typesturn them down. These results are in sharp contrast to earlier policyproposals derived for a non-equilibrium starting point. They indicatethat under asymmetric information the binding incentive problem is toprevent the polluting country from claiming not to care about theenvironment and that optimal bribes from the victim should be restrictedto sufficiently environmentally concerned polluters. Copyright Kluwer Academic Publishers 2001

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    File URL: http://hdl.handle.net/10.1023/A:1011679630804
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 19 (2001)
    Issue (Month): 4 (August)
    Pages: 343-360

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    Handle: RePEc:kap:enreec:v:19:y:2001:i:4:p:343-360

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: asymmetric information; downstream pollution; transboundary emissions; type-dependent reservation utility;

    References

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    1. Veijo Kaitala & Matti Pohjola & Olli Tahvonen, 1992. "Transboundary air pollution and soil acidification: A dynamic analysis of an acid rain game between Finland and the USSR," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(2), pages 161-181, March.
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    12. Whalley, John, 1991. "The Interface between Environmental and Trade Policies," Economic Journal, Royal Economic Society, vol. 101(405), pages 180-89, March.
    13. Barrett, Scott, 1990. "The Problem of Global Environmental Protection," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 68-79, Spring.
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    15. Henk Folmer & Pierre Mouche & Shannon Ragland, 1993. "Interconnected games and international environmental problems," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 3(4), pages 313-335, August.
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    17. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 597-625, October.
    18. Kerschbamer, Rudolf & Maderner, Nina, 1998. "Are Two a Good Representative for Many?," Journal of Economic Theory, Elsevier, vol. 83(1), pages 90-104, November.
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