Abstract
This paper employs a multi-task principal-agent model to examine how a corporation’s organizational structure and liability rules for environmental damages affect the incentive schemes offered to managers. We derive environmental liability rules for risk averse managers under two alternative organizational structures: a product-based organization (PBO) and functional-based organization (FBO). For a PBO, it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages; in a FBO it is optimal either to hold the firm liable for environmental damages or, equivalently, to only hold the environmental managers liable for damages. It is also shown that the two organizational structures are equally efficient when there is no correlation between environmental damages from products and no spillover between managerial effort across products or functions. Numerical results further reveal that beneficial spillovers between functions for the same product favours a PBO over a FBO; beneficial spillovers across functions favours a FBO.
Highlights
The interplay between compliance and environmental liability are fundamental to balancing production and environmental objectives within corporations
For a productbased organization (PBO), it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages; in a functional-based organization (FBO) it is optimal either to hold the firm liable for environmental damages or, equivalently, to only hold the environmental managers liable for damages
It is shown that the two organizational structures are efficient when there is no correlation between environmental damages from products and no spillover between managerial effort across products or functions
Summary
The interplay between compliance and environmental liability are fundamental to balancing production and environmental objectives within corporations. We address this question by examining the interlinkage between environmental liability and a corporation’s organizational structure To investigate this interdependency, we employ a multi-task principal-agent (MTPA) framework, which serves as a natural way to study the interaction between incentives and behaviour at the corporate and managerial levels. A related strand of literature that use MTPA models assesses the relative efficiency of different penalty schemes, including whether corporations or individual managers should be held liable to civil or criminal charges. Seminal contributions in this tradition (see Kraakman 2000) are Kornhauser (1982) and Sykes (1984, 1988), whereas Segerson and Tietenberg (1992) offer a first application to the specific problem of environmental enforcement. To foster transparency and clarity throughout the analysis, we concentrate here solely on the incentive structure and exclude the option of criminal sanctions
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