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Budget Balancing Incentive Mechanisms

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  • Joseph A. Herriges
  • Ramu Govindasamy
  • Jason F. Shogren

Abstract

Xepapadeas [10] develops a pollution abatement incentive mechanism that both reduces the information requirements of regulator and is "budget balancing" drawing only on the social gains from pollution abatement to encourage firm compliance. This paper demonstrates that, contrary to Xepapadeas [10], the budget balancing system of random penalties cannot be used induce compliance with the regulator's objectives if firms are risk neutral. However, the mechanism can be successfully applied if firms are sufficiently risk averse (Rasmusen [9]). Second, the paper explores the optimal design of the random fine system, including the choice of fines, penalty probabilities, and team size.

Suggested Citation

  • Joseph A. Herriges & Ramu Govindasamy & Jason F. Shogren, 1992. "Budget Balancing Incentive Mechanisms," Center for Agricultural and Rural Development (CARD) Publications 92-wp100, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:92-wp100
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