IDEAS home Printed from https://ideas.repec.org/p/hhs/osloec/1992_022.html
   My bibliography  Save this paper

Environmental Accidents Under Moral Hazard and Limited Firm Liability

Author

Listed:
  • Strand, J.

Abstract

We study optimal government policy when firms' operations involve a risk of a large environmental accident, firms do not have sufficient assets to cover such costs, and the risk is affected by firms' efforts which are unobservable to outsiders. When firms' profits and government revenues have equal weights in the social welfare function, a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident, and all its assets confiscated in the event of an accident. With a lower weight on firm profits the solution is always second best, with lower subsidies to the firm, and a firm effort lower than at the first-best solution. When firm investments affect both the required accident-preventing effort for given risk and the work effort required for a given output, the first best never involves specific investment subsidies, while a second-best solution generally always does. Copyright Kluwer Academic Publishers 1994
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Strand, J., 1992. "Environmental Accidents Under Moral Hazard and Limited Firm Liability," Memorandum 1992_022, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:1992_022
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
    4. Gabel H. Landis & Sinclair-Desgagne Bernard, 1993. "Managerial Incentives and Environmental Compliance," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 229-240, May.
    5. Schulze, William & d'Arge, Ralph C, 1974. "The Coase Proposition, Information Constraints, and Long-Run Equilibrium," American Economic Review, American Economic Association, vol. 64(4), pages 763-772, September.
    6. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(4), pages 597-625.
    7. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    8. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    9. James J. Opaluch & Thomas A. Grigalunas, 1984. "Controlling Stochastic Pollution Events through Liability Rules: Some Evidence from OCS Leasing," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 142-151, Spring.
    10. Eirik Amundsen, 1992. "Optimal failure rates and penalty-bonus policies in the offshore petroleum sector," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(5), pages 469-489, September.
    11. Hahn, Robert W, 1990. "The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
    12. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
    13. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-927, December.
    14. Mayshar, Joram, 1977. "Should Government Subsidize Risky Private Projects?," American Economic Review, American Economic Association, vol. 67(2), pages 20-28, March.
    15. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    16. Robert E. Kohn, 1985. "A General Equilibrium Analysis of the Optimal Number of Firms in a Polluting Industry," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 347-354, May.
    17. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    18. Spulber, Daniel F., 1985. "Effluent regulation and long-run optimality," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 103-116, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anthony Heyes, 1996. "Optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(1), pages 1-14, January.
    2. Jakob Eberl & Darko Jus, 2012. "Evaluating policies to attain the optimal exposure to nuclear risk," RSCAS Working Papers 2012/50, European University Institute.
    3. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
    4. Eberl, Jakob & Jus, Darko, 2012. "The year of the cat: Taxing nuclear risk with the help of capital markets," Energy Policy, Elsevier, vol. 51(C), pages 364-373.
    5. Strand, Jon, 1999. "Efficient environmental taxation under moral hazard," European Journal of Political Economy, Elsevier, vol. 15(1), pages 73-88, March.
    6. Daiki Kishishita & Susumu Sato, 2021. "Optimal risk regulation of monopolists with subjective risk assessment," Journal of Regulatory Economics, Springer, vol. 59(3), pages 251-279, June.
    7. Katrin Millock & David Zilberman, 2006. "Collective penalties and inducement of self-reporting," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00118778, HAL.
    8. Grajzl, Peter & Baniak, Andrzej, 2009. "Industry self-regulation, subversion of public institutions, and social control of torts," International Review of Law and Economics, Elsevier, vol. 29(4), pages 360-374, December.
    9. Katrin Millock & David Zilberman, 2006. "Collective penalties and inducement of self-reporting," Post-Print halshs-00118778, HAL.
    10. Thomas Aronsson & Kenneth Backlund & Karl-Gustaf Löfgren, 1998. "Nuclear Power, Externalities and Non-Standard Pigouvian Taxes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(2), pages 177-195, March.
    11. van 't Veld, Klaas & Hutchinson, Emma, 2009. "Excessive spending by firms to avoid accidents: Is it a concern in practice?," International Review of Law and Economics, Elsevier, vol. 29(4), pages 324-335, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    2. Matthias Fahn & Valeria Merlo & Georg Wamser, 2019. "The Commitment Role of Equity Financing," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1232-1260.
    3. Poitevin, Michel, 1989. "Information et marchés financiers : une revue de littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 555-589, décembre.
    4. Sumit K. Majumdar & Rabih Moussawi & Ulku Yaylacicegi, 2018. "Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 449-472, December.
    5. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133, Elsevier.
    6. Christian At & Lionel Thomas, 2015. "Optimal Lending Contracts under both Adverse Selection and Moral Hazard," Post-Print halshs-01308331, HAL.
    7. Randall K. Filer & Devra L. Golbe, 2003. "Debt, Operating Margin, and Investment In Workplace Safety," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 359-381, September.
    8. Anthony Heyes, 1996. "Optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(1), pages 1-14, January.
    9. Kumar, Praveen & Langberg, Nisan, 2013. "Information manipulation and rational investment booms and busts," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 408-425.
    10. Praveen Kumar & Nisan Langberg, 2009. "Corporate fraud and investment distortions in efficient capital markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 144-172, March.
    11. Dionne, G. & Doherty, N., 1991. "Adverse Selection In Insurance Markets: A Selective Survey," Cahiers de recherche 9105, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    12. Wei He & Qian Wang, 2020. "The peer effect of corporate financial decisions around split share structure reform in China," Review of Financial Economics, John Wiley & Sons, vol. 38(3), pages 474-493, July.
    13. Zaheer Anwer & Shamsher Mohamad & Wajahat Azmi & Akram Shavkatovich Hasanov, 2022. "Product market fluidity and religious constraints: evidence from the US market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1761-1817, April.
    14. Chen, Ruiyuan & El Ghoul, Sadok & Guedhami, Omrane & Wang, He, 2017. "Do state and foreign ownership affect investment efficiency? Evidence from privatizations," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 408-421.
    15. Cieply Sylvie, 2001. "The Radical Change of French Firms’ Financial Characteristics. Macroeconomic Consequences and Lessons for Political Economics / Die französische Finanzrevolution. Die Folgen für die Finanzstruktur der," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(5-6), pages 556-576, October.
    16. Praveen Kumar & Nisan Langberg & K. Sivaramakrishnan, 2012. "Voluntary Disclosures, Corporate Control, and Investment," Journal of Accounting Research, Wiley Blackwell, vol. 50(4), pages 1041-1076, September.
    17. Bernini, Michele & Guillou, Sarah & Bellone, Flora, 2015. "Financial leverage and export quality: Evidence from France," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 280-296.
    18. Giacinta Cestone & Lucy White, "undated". "Anti-Competitive Financial Contracting: The Design Of Financial Claims," UFAE and IAE Working Papers 453.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    19. Eva Schliephake & Roland Kirstein, 2013. "Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 675-700, June.
    20. Christian Picory & Bernard Geffroy, 1995. "Degré d'intégration bancaire des PME : Une approche par l'organisation industrielle," Revue Économique, Programme National Persée, vol. 46(2), pages 365-392.

    More about this item

    Keywords

    environment ; enterprises ; risk;
    All these keywords.

    Statistics

    Access and download statistics

    Corrections

    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:hhs:osloec:1992_022. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mari Strønstad Øverås (email available below). General contact details of provider: https://edirc.repec.org/data/souiono.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.