Abstract
AbstractWe discuss the decision to delegate the regulation of pollution through sales of permits to a biased expert in a situation where the polluting firm has private information about its technology. We consider, in particular, constrained delegation where the government puts restrictions on the amount of pollution that the expert can sell permits for. We find that, in general, delegation is more likely if the firm is low‐cost. This is not in line with the so‐called uncertainty principle, which states that there is more delegation the more uncertainty the government faces.
Highlights
One way to regulate a polluting industry is to require a firm to purchase pollution permits sold by the government in order to be allowed to pollute
A standard solution to such an asymmetry of information is for the government to offer a menu of combinations of transfers and pollution permits, such that the firm self-selects in its choice of combination according to its technology, creating a distortion in the pollution level of a high-cost firm and an information rent for a low-cost firm
The advantage of hiring an expert is that she has knowledge of the technology of the firm; in the present analysis, we discuss the case where she has perfect such knowledge and does not have to spend resources at all on distorting the pollution level for a high-cost firm or offering an information rent to a low-cost firm that the government would without the expert
Summary
One way to regulate a polluting industry is to require a firm to purchase pollution permits sold by the government in order to be allowed to pollute. The advantage of hiring an expert is that she has knowledge of the technology of the firm; in the present analysis, we discuss the case where she has perfect such knowledge and does not have to spend resources at all on distorting the pollution level for a high-cost firm or offering an information rent to a low-cost firm that the government would without the expert. One difference between the two analyses concerns the prevalence of no delegation when the probability of the firm having low costs is very high: this prevalence is higher in the present permits setting than in the procurement setting of Kundu and Nilssen (2020); we discuss this issue in more detail towards the end of Section IV.
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