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The Effects of Bailouts and Soft Budget Constraints on the Environment

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  • Joel Wood

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Abstract

This paper investigates the effects of financial relief programs, commonly referred to as ‘bailouts’, on pollution. A partial equilibrium soft budget constraint model of the firm is developed to identify the effect of bailouts on the emission decisions of firms. The results from the model indicate that the expectation of bailouts increases ex ante emissions. A more stringent emissions tax is required to achieve the same level of emissions if bailouts are available than if bailouts are not available; however, a tradable permit system will maintain the same emissions level if bailouts are available as when bailouts are not available. Copyright Springer Science+Business Media B.V. 2013

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File URL: http://hdl.handle.net/10.1007/s10640-012-9584-0
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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): 54 (2013)
Issue (Month): 1 (January)
Pages: 127-137

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Handle: RePEc:kap:enreec:v:54:y:2013:i:1:p:127-137

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

Related research

Keywords: Bailouts; Moral hazard; Pollution; Soft budget constraints; Uncertainty; Q58; H23; P31;

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  1. Lin, Justin Yifu & Li, Zhiyun, 2008. "Policy burden, privatization and soft budget constraint," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 90-102, March.
  2. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
  3. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  4. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, vol. 39(1), pages 3-30.
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  7. Goldfeld, Stephen M. & Quandt, Richard E., 1988. "Budget constraints, bailouts, and the firm under central planning," Journal of Comparative Economics, Elsevier, vol. 12(4), pages 502-520, December.
  8. Prell, Mark A., 1996. "The Two Kornai Effects," Journal of Comparative Economics, Elsevier, vol. 22(3), pages 267-276, June.
  9. Goldfeld, Stephen M. & Quandt, Richard E., 1990. "Output targets, the soft budget constraint and the firm under central planning," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 205-222, October.
  10. Goldfeld, Stephen M. & Quandt, Richard E., 1992. "Effects of bailouts, taxes, and risk-aversion on the enterprise," Journal of Comparative Economics, Elsevier, vol. 16(1), pages 150-167, March.
  11. Goldfeld, Stephen M. & Quandt, Richard E., 1993. "Uncertainty, bailouts, and the Kornai effect," Economics Letters, Elsevier, vol. 41(2), pages 113-119.
  12. Werner Antweiler, 2003. "How Effective Is Green Regulatory Threat?," American Economic Review, American Economic Association, vol. 93(2), pages 436-441, May.
  13. Magee, Karen L & Quandt, Richard E, 1994. " The Kornai Effect with Partial Bailouts and Taxes," Economic Change and Restructuring, Springer, vol. 27(1), pages 27-38.
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