IDEAS home Printed from https://ideas.repec.org/a/kap/regeco/v48y2015i1p26-52.html
   My bibliography  Save this article

Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines

Author

Listed:
  • Ben White

Abstract

Using a Pigovian tax to provide incentives for mine rehabilitation may be ineffective if limited liability, (judgement-proof) firms can declare themselves bankrupt to avoid the tax and rehabilitation costs. This paper introduces a model of environmental policy for mining that accounts for bankruptcy risk, profit risk, and a mobilization cost that applies if, following bankruptcy, rehabilitation is funded by the regulator or investor. The results show that making deep-pocketed investors who are never judgement-proof liable for a share of rehabilitation cost is optimal. The share of extended liability depends on the policy setting, control rights over the firm and the firm’s rent. If the firm has control rights over bankruptcy, optimal liability is at least the full cost of rehabilitation. If the investor has control rights then optimal liability is partial. Partial liability also applies when the policy is based on an insurance contract. Mobilization costs for a regulator to engage in rehabilitation mean it is socially optimal for an investor to “prop-up” a firm making moderate losses to complete mine rehabilitation. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Ben White, 2015. "Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines," Journal of Regulatory Economics, Springer, vol. 48(1), pages 26-52, August.
    • Handle: RePEc:kap:regeco:v:48:y:2015:i:1:p:26-52
    DOI: 10.1007/s11149-015-9276-0
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11149-015-9276-0
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11149-015-9276-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jason F. Shogren & Joseph A. Herriges & Ramu Govindasamy, 1991. "Limits to Environmental Bonds: Lessons from the Labor Literature," Center for Agricultural and Rural Development (CARD) Publications 91-wp82, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. David P. Baron, 1985. "Noncooperative Regulation of a Nonlocalized Externality," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 553-568, Winter.
    3. Yeon‐Koo Che & Kathryn E. Spier, 2008. "Strategic judgment proofing," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 926-948, December.
    4. 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, April.
    5. Jean Tirole, 2010. "From Pigou to Extended Liability: On the Optimal Taxation of Externalities Under Imperfect Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 697-729.
    6. Earnhart, Dietrich & Segerson, Kathleen, 2012. "The influence of financial status on the effectiveness of environmental enforcement," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 670-684.
    7. White, Ben & Doole, Graeme J. & Pannell, David J. & Florec, Veronique, 2012. "Optimal environmental policy design for mine rehabilitation and pollution with a risk of non-compliance owing to firm insolvency," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(2), pages 1-22.
    8. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation," CIRANO Working Papers 2008s-03, CIRANO.
    9. Burton, Michael & Jasmine Zahedi, Shegufa & White, Ben, 2012. "Public preferences for timeliness and quality of mine site rehabilitation. The case of bauxite mining in Western Australia," Resources Policy, Elsevier, vol. 37(1), pages 1-9.
    10. Gerard, David, 2000. "The law and economics of reclamation bonds," Resources Policy, Elsevier, vol. 26(4), pages 189-197, December.
    11. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    12. Yolande Hiriart & David Martimort, 2006. "The benefits of extended liability," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 562-582, September.
    13. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
    14. H.F. Campbell & K.A. Bond, 1997. "The Cost of Public Funds in Australia," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 22-34, March.
    15. Perrings, Charles, 1989. "Environmental bonds and environmental research in innovative activities," Ecological Economics, Elsevier, vol. 1(1), pages 95-110, February.
    16. Farzin, Y. H., 1996. "Optimal pricing of environmental and natural resource use with stock externalities," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 31-57, October.
    17. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    18. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-1186, December.
    19. Shogren, Jason F. & Herriges, Joseph A. & Govindasamy, Ramu, 1993. "Limits to environmental bonds," Ecological Economics, Elsevier, vol. 8(2), pages 109-133, October.
    20. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    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. Huhtala, Anni & Ropponen, Olli, 2020. "Resource and Environmental Policies for the Mining Industry: What Should Governments Do About the Increasing Social and Environmental Risks?," Working Papers 137, VATT Institute for Economic Research.
    2. Aghakazemjourabbaf, Sara & Insley, Margaret, 2021. "Leaving your tailings behind: Environmental bonds, bankruptcy and waste cleanup," Resource and Energy Economics, Elsevier, vol. 65(C).
    3. Yang, Peifang & Davis, Graham A., 2018. "Non-renewable resource extraction under financial incentives to reduce and reverse stock pollution," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 282-299.
    4. Lappi, Pauli, 2020. "On optimal extraction under asymmetric information over reclamation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    5. Lechner, Alex Mark & Kassulke, Owen & Unger, Corinne, 2016. "Spatial assessment of open cut coal mining progressive rehabilitation to support the monitoring of rehabilitation liabilities," Resources Policy, Elsevier, vol. 50(C), pages 234-243.
    6. Lappi, Pauli, 2020. "A model of optimal extraction and site reclamation," Resource and Energy Economics, Elsevier, vol. 59(C).

    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. Ben White & Graeme J. Doole & David J. Pannell & Veronique Florec, 2012. "Optimal environmental policy design for mine rehabilitation and pollution with a risk of non‐compliance owing to firm insolvency," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(2), pages 280-301, April.
    2. Sara Aghakazemjourabbaf & Margaret Insley, 2018. "Optimal timing of harzardous waste clean-up under an environmental bond an a strict liability rule," Working Papers 1803, University of Waterloo, Department of Economics, revised 06 Jan 2018.
    3. Hiriart, Yolande & Thomas, Lionel, 2017. "The optimal regulation of a risky monopoly," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 111-136.
    4. Aghakazemjourabbaf, Sara & Insley, Margaret, 2021. "Leaving your tailings behind: Environmental bonds, bankruptcy and waste cleanup," Resource and Energy Economics, Elsevier, vol. 65(C).
    5. Mondello, Gérard, 2012. "La responsabilité environnementale des prêteurs : difficultés juridiques et ensemble des possibles," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 257-278, Juin.
    6. Gérard Mondello, 2012. "Strict Liability, Capped Strict Liability, and Care Effort under Asymmetric Information," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(2), pages 232-251, June.
    7. Seshimo, Hiroyuki, 2022. "Optimal extended liability rule in a competitive financial market with heterogeneous borrower firms," Journal of Mathematical Economics, Elsevier, vol. 98(C).
    8. Gérard Mondello, 2010. "Risky Activities and Strict Liability Rules: Delegating Safety," Working Papers 2010.103, Fondazione Eni Enrico Mattei.
    9. Gérard Mondello, 2017. "Lenders and Risky Activities: Strict Liability or Negligence Rule?," GREDEG Working Papers 2017-13, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    10. La Nauze, Andrea & Mezzetti, Claudio, 2019. "Dynamic incentive regulation of diffuse pollution," Journal of Environmental Economics and Management, Elsevier, vol. 93(C), pages 101-124.
    11. Yang, Peifang & Davis, Graham A., 2021. "Why don't environmental bonds fully cover reclamation costs?," Energy Policy, Elsevier, vol. 152(C).
    12. Igarashi, Yoshiyuki & Coupal, Roger & Finnoff, David & Andersen, Matthew A., 2014. "Economics of Oil and Gas Development in the Presence of Reclamation and Bonding Requirements," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170600, Agricultural and Applied Economics Association.
    13. Jacob Julien, 2021. "The (Mixed) Effects of Minimum Asset Requirements When There is a Possibility of Technological Change," Review of Law & Economics, De Gruyter, vol. 17(1), pages 167-191, March.
    14. Kim, Byung-Cheol & Oliver, Matthew E., 2017. "Taming drillers through legislative action: Evidence from Pennsylvania’s shale gas industry," Resource and Energy Economics, Elsevier, vol. 50(C), pages 15-35.
    15. Zhou, Jane, 2014. "Beyond Liability: An Analysis of Financial Responsibility and Care Decisions in Hazardous Waste Management Facilities," Working Papers 182293, University of Maryland, Department of Agricultural and Resource Economics.
    16. Ichinose, Daisuke, 2011. "Contractor selection problem under extended liability," International Review of Law and Economics, Elsevier, vol. 31(1), pages 48-57, March.
    17. Ben White & Nick Hanley, 2014. "Should We Pay for Ecosystem Service Outputs, Actions or Both?," Discussion Papers in Environment and Development Economics 2014-08, University of St. Andrews, School of Geography and Sustainable Development.
    18. Ben White & Nick Hanley, 2016. "Should We Pay for Ecosystem Service Outputs, Inputs or Both?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 765-787, April.
    19. Yeon‐Koo Che & Kathryn E. Spier, 2008. "Strategic judgment proofing," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 926-948, December.
    20. Heider, Florian & Inderst, Roman, 2021. "A Corporate Finance Perspective on Environmental Policy," EconStor Preprints 253669, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

    Mining; Non-renewable resources; Limited liability; Environmental bonds; Bankruptcy; Q58;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    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:kap:regeco:v:48:y:2015:i:1:p:26-52. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.