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The Effects of Bailouts and Soft Budget Constraints on the Environment

  • Joel Wood

    ()

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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Article provided by Springer & 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
DOI: 10.1007/s10640-012-9584-0
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  1. Desai, Raj M. & Olofsgard, Anders, 2006. "The political advantage of soft budget constraints," European Journal of Political Economy, Elsevier, vol. 22(2), pages 370-387, June.
  2. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
  3. 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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  5. 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.
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  7. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
  8. Prell, Mark A., 1996. "The Two Kornai Effects," Journal of Comparative Economics, Elsevier, vol. 22(3), pages 267-276, June.
  9. 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.
  10. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
  11. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, vol. 39(1), pages 3-30.
  12. Werner Antweiler, 2003. "How Effective Is Green Regulatory Threat?," American Economic Review, American Economic Association, vol. 93(2), pages 436-441, May.
  13. 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.
  14. McKitrick, Ross, 1999. "A Derivation of the Marginal Abatement Cost Curve," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 306-314, May.
  15. 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.
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