The Regulator and the Judge: The Optimal Mix in The Control of Environmental Risk
A firm engaged in activities which are environmentally risky has private information both on its choice of safety care and on the level of its assets. We study the interaction between the ex ante audit of the firm's precautionary effort by a regulator and the ex post check on the true level of the firm's assets by a judge following an accident. Both instruments are useful from an incentive viewpoint. The optimal policy mix between the regulator and the judge depends on the rule determining the judge's intervention and on the quality of the regulatory enforcement. We discuss the incentives of the judge and the regulator to broaden their mandates and undertake the task of the other branch. Finally, we interpret different scenarii for the regulator's and the judge's interventions in terms of legal principles.
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