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Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy

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  • Marcel Boyer
  • Donatella Porrini

Abstract

We analyze the conditions under which a legal intervention can be compared to a regulatory framework in the context of a political economy model of environmental policy. The first part of the paper describes the characteristics of the different instruments we want to compare: first, an assignment of legal liability, focusing on the case of extended lender liability, and second, an incentive regulation framework. We briefly describe the application of those instruments in the United States and Europe. In the second part a formal economy model is presented where the possibility of capture of the regulatory agency is modeled in a reduced-form fashion through an overvaluation of the social value of the informational rent of the firms. We show that compared with an extended, strict, joint and several liability system, a regulatory system may perform better or worse from a welfare point of view. Three factors underlying this comparison are discussed in some depth, namely the differential cost between low and high levels of environmental protection activities, the social cost of public funds and the overvaluation factor. Nous analysons les conditions sous lesquelles les approches légale et réglementaire peuvent être comparées dans le cadre d'un modèle d'économie politique de l'implémentation de la politique environnementale. La première partie de l'article décrit les caractéristiques essentielles des divers instruments à comparer, à savoir un régime de responsabilité légale élargie aux prêteurs et un régime de réglementation incitative, instruments typiquement utilisés aux États-Unis et en Europe. Dans la deuxième partie, un modèle formel d'économie politique est développé. La possibilité d'une capture de l'agence de réglementation est introduite sous forme réduite par la surévaluation de la valeur sociale de la rente informationnelle des entreprises. Nous montrons qu'un régime de réglementation incitative peut être plus ou moins performant en termes de bien-être qu'un régime de responsabilité élargie, stricte et solidaire. Nous analysons en profondeur trois facteurs principaux de cette comparaison, à savoir le différentiel de coût entre les niveaux faible et élevé de la protection environnementale, le coût social des fonds publics et le facteur de surévaluation.

Suggested Citation

  • Marcel Boyer & Donatella Porrini, 2000. "Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy," CIRANO Working Papers 2000s-57, CIRANO.
  • Handle: RePEc:cir:cirwor:2000s-57
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    File URL: http://www.cirano.qc.ca/files/publications/2000s-57.pdf
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    References listed on IDEAS

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    1. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
    2. Heyes, Anthony G, 1996. "Lender Penalty for Environmental Damage and the Equilibrium Cost of Capital," Economica, London School of Economics and Political Science, vol. 63(250), pages 311-323, May.
    3. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
    4. Peter S. Menell, 1991. "The Limitations of Legal Institutions for Addressing Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 93-113, Summer.
    5. GOBERT, Karine & POITEVIN, Michel, 1998. "Environmental Risks : Should Banks Be Liable?," Cahiers de recherche 1198, Universite de Montreal, Departement de sciences economiques.
    6. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(1), pages 232-258, April.
    7. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
    8. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    9. Hahn, Robert W, 1990. "The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
    10. Dionne, Georges & Spaeter, Sandrine, 2003. "Environmental risk and extended liability: The case of green technologies," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1025-1060, May.
    11. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-1186, December.
    12. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    13. Kornhauser, Lewis A & Revesz, Richard L, 1994. "Multidefendant Settlements under Joint and Several Liability: The Problem of Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 517-542, January.
    14. Karine Gobert, 1999. "Responsabilité des créanciers en matière environnementale," CIRANO Project Reports 1999rp-12, CIRANO.
    15. Marcel Boyer & Tracy R. Lewis & Wei Lin Liu, 2000. "Setting standards for credible compliance and law enforcement," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 319-340, May.
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    Citations

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    Cited by:

    1. Marcel Boyer & Donatella Porrini, 2004. "Modelling the choice between regulation and liability in terms of social welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 590-612, August.
    2. Michel Cavagnac, 2003. "Environmental standard setting by a supra-regional authority: customisation or convergence?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 30(4), pages 415-437, December.
    3. BOYER, Marcel & PORRINI, Donatella, 2010. "Optimal Liability Sharing and Court Errors : An Exploratory Analysis," Cahiers de recherche 05-2010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    4. Boyer, Marcel & Porrini, Donatella, 2011. "The impact of court errors on liability sharing and safety regulation for environmental/industrial accidents," International Review of Law and Economics, Elsevier, vol. 31(1), pages 21-29, March.
    5. Yolande Hiriart & David Martimort & Jérôme Pouyet, 2008. "The Regulator and the Judge : The Optimal Mix in The Control of Environmental Risk," Revue d'économie politique, Dalloz, vol. 118(6), pages 941-967.
    6. Pierre Bentata, 2014. "Liability as a complement to environmental regulation: an empirical study of the French legal system," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 16(3), pages 201-228, July.
    7. Hiriart, Yolande & Martimort, David & Pouyet, Jerome, 2010. "The public management of risk: Separating ex ante and ex post monitors," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1008-1019, December.
    8. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation," CIRANO Working Papers 2008s-03, CIRANO.
    9. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.
    10. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
    11. Hiriart, Yolande & Martimort, David, 2004. "Environmental Risk Regulation and Liability under Adverse Selection and Moral Hazard," IDEI Working Papers 256, Institut d'Économie Industrielle (IDEI), Toulouse.
    12. Yolande Hiriart & David Martimort & Jérôme Pouyet, 2009. "The public management of risk: Separating ex ante and ex post monitors," Working Papers halshs-00566863, HAL.
    13. Hiriart, Yolande & Martimort, David & Pouyet, Jérôme, 2005. "The Public Management of Environmental Risk: Separating Ex Ante and Ex Post Monitors," CEPR Discussion Papers 4992, C.E.P.R. Discussion Papers.

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