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Optimal Pollution Regulation in a Dynamic Stochastic Model

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  • Sudhir A. Shah

    (Delhi School of Economics)

Abstract

We model the interaction between a regulator and a polluting firm in the optimal mechanism design setting. The particular aspect of the interaction that we model is the regulator's problem of providing incentives to induce optimal adoption of pollution processing technology by the firm, subject to implementability constraints created by informational and incentive considerations. The regulator's welfare function is a formalization of the various conflicts and trade-offs that arise from the phenomenon of pollution. Our model offers a general, yet tractable, dynamic stochastic description of the pollution-creating technology used by the firm and characterizes the optimal contract in terms of a limited number of parameters that can be estimated directly from statistical data for the purpose of simulation and econometric testing.

Suggested Citation

  • Sudhir A. Shah, 2000. "Optimal Pollution Regulation in a Dynamic Stochastic Model," Working papers 84, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:84
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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