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Getting Polluters to Tell the Truth


  • Marcelo Caffera

    (Universidad de Montevideo)

  • Juan Dubra

    (Universidad de Montevideo)


We study the problem of a regulator who must control the emissions of a given pollutant from a series of industries when the firms' abatement costs are unknown. We develop a mechanism in which the regulator asks firms to report their abatement costs and implements the most stringent emissions standard consistent with the firms' declarations. He also inspects one of the firms in each industry which declared the cost structure consistent with the least stringent emissions standard and with an arbitrarily small probability, he discovers whether the report was true or not. The firm is punished with an arbitrarily small fine if and only if its report was false. This mechanism is simple, is implementable in practice, its unique equilibrium is truth telling by firms, it implements the first best pollution standards and shares some features of the regulatory processes actually observed in reality.

Suggested Citation

  • Marcelo Caffera & Juan Dubra, 2005. "Getting Polluters to Tell the Truth," Microeconomics 0504008, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0504008
    Note: Type of Document - pdf; pages: 14

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    References listed on IDEAS

    1. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
    2. Ignacio Ortuño-Ortin & John E. Roemer, 1993. "Politically Realistic Implementation With Inspection: The Equity-Honesty-Welfare Trade-Off," Economics and Politics, Wiley Blackwell, vol. 5(3), pages 255-270, November.
    3. Clifford S. Russell & Philip T. Powell, 1996. "Choosing Environmental Policy Tools: Theoretical Cautions and Practical Considerations," IDB Publications (Working Papers) 25258, Inter-American Development Bank.
    4. Partha Dasgupta & Peter Hammond & Eric Maskin, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Oxford University Press, vol. 47(5), pages 857-860.
    5. Kim-Sau Chung & Jeffrey C. Ely, 2003. "Implementation with Near-Complete Information," Econometrica, Econometric Society, vol. 71(3), pages 857-871, May.
    6. Jackson Matthew O. & Palfrey Thomas R. & Srivastava Sanjay, 1994. "Undominated Nash Implementation in Bounded Mechanisms," Games and Economic Behavior, Elsevier, vol. 6(3), pages 474-501, May.
    7. Matthew O. Jackson & Sanjay Srivastava, 1992. "Characterizations of Game Theoretic Solutions which Lead to Impossibility Theorems," Discussion Papers 1004, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Anil Arya & Jonathan Glover, "undated". "Maintaining Auditor Independence," Corporate Finance & Organizations _017, Ohio State University.
    9. Matthew O. Jackson, 1992. "Implementation in Undominated Strategies: A Look at Bounded Mechanisms," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 757-775.
    10. Evan Kwerel, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 595-601.
    11. Palfrey, Thomas R & Srivastava, Sanjay, 1991. "Nash Implementation Using Undominated Strategies," Econometrica, Econometric Society, vol. 59(2), pages 479-501, March.
    12. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
    13. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics,in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier.
    14. Ortuno-Ortin, I. & Roemer, J.E., 1988. "Implementation With Inspection," Papers 327, California Davis - Institute of Governmental Affairs.
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    Cited by:

    1. Marcelo Caffera & Juan Dubra & Nicolás Figueroa, 2016. "Mechanism Design when players´ preferences and information coincide," Documentos de Trabajo/Working Papers 1603, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    2. repec:eee:matsoc:v:91:y:2018:i:c:p:56-61 is not listed on IDEAS

    More about this item


    Emissions Standards; Command and Control; Undominated Nash Implementation;

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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