IDEAS home Printed from
   My bibliography  Save this paper

Some Aspects of Incentive-Based Optimal Pricing and Environmental Regulation with Asymmetric Information


  • Saptarshi Basu Roy Choudhury
  • Meeta K. Mehra

    () (Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi)


The paper aims to analyze the problem of regulating a pollution-generating single product monopolistic firm in the presence of information asymmetry about the firm?s cost performance. Following Boyer and Laffont (1999), incentive-based optimal regulation of the firm?s price/ output and the environmental performance is characterized when costs are increasing in output and declining in pollution generated during production. Further, the regulatory agency/ legislator may or may not be politically motivated. When he/ she is politically inclined, the process of lobbying assumes that interest groups offer monetary contributions to the regulatory agency or the legislator. These contributions from the lobby help fund election campaigns. Thus, he/ she no longer behaves as a benevolent maximizer of social welfare, but instead maximizes a weighted average of social welfare and welfare of the lobby. Two alternative cases are considered: one, where the lobby represents environmental interests alone, and another, where the lobby stands solely for firm?s/ industry?s interests. The analysis derives interesting implications for incentive-based regulation of the firm. In general, pricing and environmental performance are distorted for the inefficient firm type under asymmetric information to restrict rents accruing to the efficient firm type. In the presence of the environmental lobby, the politically inclined regulator imposes more stringent environmental regulation under both full information and incomplete information as compared to the no-lobbying case. Interestingly, lobbying by the firm/ industry group also induces the politically motivated regulator to have more restrictive environmental regulation, albeit it now combines it with a higher regulated output for the inefficient firm type under incomplete information vis-…-vis the case of no-lobbying activity.

Suggested Citation

  • Saptarshi Basu Roy Choudhury & Meeta K. Mehra, "undated". "Some Aspects of Incentive-Based Optimal Pricing and Environmental Regulation with Asymmetric Information," Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi Discussion Papers 10-01, Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi, India.
  • Handle: RePEc:ind:citdwp:10-01

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ind:citdwp:10-01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamprasad M. Pujar). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.