Environmental regulation, asymmetric information, and moral hazard
Wainwright, Kevin (Kevin Wainwright (Kevin_Wainwright)) (author)
© 1999 Kevin Wainwright
This paper presents a model of environmental regulation in the presence of measurement costs and asymmetric information. Environmental regulation can be viewed as a form of agency problem where the polluting firms may have better information about the true level of their abatement activities than the regulator. If certain aspects of environmental quality are costly to measure, regulators may resort to proxies to infer information about environmental quality. This may allow firms to circumvent the regulatory constraints by maximizing along those margins that are costly to measure. This problem is especially acute when a single firm produces multiple pollutants.