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Risk Aversion and Compliance in Markets for Pollution Control

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  • Stranlund, John K.

Abstract

This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm's decision to be compliant or not is independent of its manager's risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers' utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.

Suggested Citation

  • Stranlund, John K., 2006. "Risk Aversion and Compliance in Markets for Pollution Control," Working Paper Series 14522, University of Massachusetts, Amherst, Department of Resource Economics.
    • Handle: RePEc:ags:umamwp:14522
    DOI: 10.22004/ag.econ.14522
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    Cited by:

    1. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
    2. Yano, Yuki & Blandford, David, 2008. "Use of Penalties and Rewards in Agri-Environmental Policy," 82nd Annual Conference, March 31 - April 2, 2008, Royal Agricultural College, Cirencester, UK 36873, Agricultural Economics Society.
    3. Restiani, Phillia & Betz, Regina, 2010. "A Theoretical Model of Optimal Compliance Decisions under Different Penalty Designs in Emissions Trading Markets," Research Reports 107585, Australian National University, Environmental Economics Research Hub.
    4. Fatih Karanfil, 2011. "Environmental regulation in the presence of unrecorded economy," International Economics, CEPII research center, issue 126-127, pages 91-108.

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    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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