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Budget Balancing Incentive Mechanisms


  • Herriges, Joseph A.
  • Shogren, Jason F.
  • Govindasamy, R.


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.
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Suggested Citation

  • Herriges, Joseph A. & Shogren, Jason F. & Govindasamy, R., 1994. "Budget Balancing Incentive Mechanisms," Staff General Research Papers Archive 1503, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:1503

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