Menus of price-quantity contracts for inducing the truth in environmental regulation |
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| Institution: | 1. Department of Economics, University of Hagen, Universitätsstr. 41, 58097 Hagen, Germany;2. Department of Economics, University of Siegen, Unteres Schloss 3, 57072 Siegen, Germany;1. Department of Management, Technology, and Economics, ETH Zurich, and Center for Economic Research at ETH (CER-ETH), Zürichbergstrasse 18, 8032 Zurich, Switzerland;2. Joint Program on the Science and Policy of Global Change, Massachusetts Institute of Technology, Cambridge, USA;1. Department of Economics, University of Strathclyde, Glasgow G4 0QU, UK;2. School of Economics, University of Queensland, Brisbane 4072, Australia |
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| Abstract: | Many authors have proposed mechanisms to induce regulated polluting firms to truthfully reveal their private information. This paper proposes an alternative scheme in which the regulator offers each firm a menu of linear price-quantity contracts; faced with this menu, each firm′s dominant strategy is to truthfully report its private information and self-select the contract that is ex post efficient. The proposed menu schedule that is more elastic than the firm′s residual marginal damage function engenders a positive quantity effect, thereby counterbalancing the firm′s incentive to misreport prompted by the linearity of price. Due to its built-in price quantity structure, the scheme performs as designed regardless of the elasticities of marginal damage and demand functions. |
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| Keywords: | Menus Dominant strategy Residual damage Pecuniary externality |
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