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Bankruptcy Risk, Limited Liability and Imperfectly Enforced Emissions Taxes


  • John Stranlund

    () (Department of Resource Economics, University of Massachusetts-Amherst)

  • Wei Zhang

    () (Department of Agricultural and Resource Economics, University of California-Davis)


Under reasonable conditions, noncompliance with an emissions tax has no effect on environmental outcomes or the efficient allocation of individual emissions control. Moreover, differences in individual tax violations are independent of firm-level differences. All of these desirable characteristics disappear when some firms under an emissions tax risk bankruptcy. The combination of imperfect enforcement, bankruptcy risk, and limited liability in bankrupt states produces an inefficient distribution of emissions control, higher aggregate emissions, and makes individual violations dependent on firm-level characteristics.

Suggested Citation

  • John Stranlund & Wei Zhang, 2009. "Bankruptcy Risk, Limited Liability and Imperfectly Enforced Emissions Taxes," Economics Bulletin, AccessEcon, vol. 29(4), pages 3134-3146.
  • Handle: RePEc:ebl:ecbull:eb-09-00505

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    References listed on IDEAS

    1. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
    2. Damania, Richard & Bulte, Erwin H., 2006. "Renewable resource regulation and uncertain prices: The role of financial structure and bankruptcy," Resource and Energy Economics, Elsevier, vol. 28(1), pages 41-53, January.
    3. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    4. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
    5. Damania, R., 2000. "Financial structure and the effectiveness of pollution control in an oligopolistic industry," Resource and Energy Economics, Elsevier, vol. 22(1), pages 21-36, January.
    6. repec:ebl:ecbull:v:17:y:2008:i:9:p:1-9 is not listed on IDEAS
    7. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
    8. Harford, Jon D., 1987. "Self-reporting of pollution and the firm's behavior under imperfectly enforceable regulations," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 293-303, September.
    9. Agnar Sandmo, 2002. "Efficient Environmental Policy with Imperfect Compliance," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(1), pages 85-103, September.
    10. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
    11. Murphy, James J. & Stranlund, John K., 2006. "Direct and market effects of enforcing emissions trading programs: An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 61(2), pages 217-233, October.
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    More about this item


    Emissions Taxes; Enforcement; Bankruptcy; Limited Liability;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • L5 - Industrial Organization - - Regulation and Industrial Policy


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