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Environmental Liability and Organizational Structure

Author

Listed:
  • Laurent Franckx

    (Royal Military Academy)

  • F.P. de Vries

    (Department of Economics and CentER,Tilburg University, The Netherlands))

Abstract

This paper presents a multitask principal-agent model to examine how environmental liability rules for individual managers within a corporate hierarchy affect, on the one hand, the incentive schemes the organization provides and, on the other hand, the choice between a functional or a product-based organizational structure. If managers are risk neutral, a product-based organization dominates a functional organization and allows to obtain first-best effort level. If, moreover, there are no diseconomies of span, both organizational forms are equivalent. It is also shown that for the dominant function, effort levels are higher in a product-based organization than in a functional one. With risk averse managers, no organizational structure dominates the other in general, but we are able to identify under which conditions it does not matter who is held liable for environmental damages.

Suggested Citation

  • Laurent Franckx & F.P. de Vries, 2004. "Environmental Liability and Organizational Structure," Energy, Transport and Environment Working Papers Series ete0401, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    • Handle: RePEc:ete:etewps:ete0401
    as

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    File URL: http://feb.kuleuven.be/drc/Economics/misc/ete_workingpapers/ete-wp-2004-01.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    contracts; liability; firm structure; principal-agent;
    All these keywords.

    JEL classification:

    • K3 - Law and Economics - - Other Substantive Areas of Law
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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