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Institutional Design for Environmental Acts

Author

Listed:
  • Louise Guillouet
  • David Martimort

Abstract

Environmental decisions often involve irreversibility and uncertainty. We develop a dynamic model in which actions yield flow benefits, but, once an unknown tipping point is crossed, the accumulated stock of past actions raises the risk of irreversible catastrophe. Because constitutions are incomplete contracts, contingent policies cannot be fully specified, and authority is delegated to decision-makers who observe the current stock but hold biased beliefs, decreasing welfare. Such delegation is thus costly. Imposing caps on early actions can limit discretion and improve welfare, providing foundations for the precautionary principle as a second-best institution.

Suggested Citation

  • Louise Guillouet & David Martimort, 2026. "Institutional Design for Environmental Acts," AEA Papers and Proceedings, American Economic Association, vol. 116, pages 538-543, May.
    • Handle: RePEc:aea:apandp:v:116:y:2026:p:538-543
    DOI: 10.1257/pandp.20261066
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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