Environmental Accidents Under Moral Hazard and Limited Firm Liability
AbstractWe study optimal government policy when firms' operations involve a risk of a large environmental accident, firms do not have sufficient assets to cover such costs, and the risk is affected by firms' efforts which are unobservable to outsiders. When firms' profits and government revenues have equal weights in the social welfare function, a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident, and all its assets confiscated in the event of an accident. With a lower weight on firm profits the solution is always second best, with lower subsidies to the firm, and a firm effort lower than at the first-best solution. When firm investments affect both the required accident-preventing effort for given risk and the work effort required for a given output, the first best never involves specific investment subsidies, while a second-best solution generally always does. Copyright Kluwer Academic Publishers 1994
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Bibliographic InfoPaper provided by Oslo University, Department of Economics in its series Memorandum with number 22/1992.
Length: 19 pages
Date of creation: 1992
Date of revision:
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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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environment ; enterprises ; risk;
Other versions of this item:
- Jon Strand, 1994. "Environmental accidents under moral hazard and limited firm liability," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 495-509, October.
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