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Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines

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  • Ben White

Abstract

Using a Pigovian tax to provide incentives for mine rehabilitation may be ineffective if limited liability, (judgement-proof) firms can declare themselves bankrupt to avoid the tax and rehabilitation costs. This paper introduces a model of environmental policy for mining that accounts for bankruptcy risk, profit risk, and a mobilization cost that applies if, following bankruptcy, rehabilitation is funded by the regulator or investor. The results show that making deep-pocketed investors who are never judgement-proof liable for a share of rehabilitation cost is optimal. The share of extended liability depends on the policy setting, control rights over the firm and the firm’s rent. If the firm has control rights over bankruptcy, optimal liability is at least the full cost of rehabilitation. If the investor has control rights then optimal liability is partial. Partial liability also applies when the policy is based on an insurance contract. Mobilization costs for a regulator to engage in rehabilitation mean it is socially optimal for an investor to “prop-up” a firm making moderate losses to complete mine rehabilitation. Copyright Springer Science+Business Media New York 2015

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  • Ben White, 2015. "Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines," Journal of Regulatory Economics, Springer, vol. 48(1), pages 26-52, August.
    • Handle: RePEc:kap:regeco:v:48:y:2015:i:1:p:26-52
    DOI: 10.1007/s11149-015-9276-0
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    6. Lappi, Pauli, 2020. "On optimal extraction under asymmetric information over reclamation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Mining; Non-renewable resources; Limited liability; Environmental bonds; Bankruptcy; Q58;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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