What's the damage? Environmental regulation with policy‐motivated bureaucrats

Abstract

In choosing environmental policy, governments rely on information provided by bureaucrats, who may have a political motivation of their own. We analyze the ensuing principal–agent relationship and derive the government's optimal contract. We find that a regulatory agent who is more environmentalist than the government is rewarded for truthfully stating that the environmental impact of the regulated economic activity is low (and vice versa). The bureaucrat has a stronger influence on policy if there is greater uncertainty about the environmental impact, or if the policy choice has a strong weight in his utility function. For some impact values, the bureaucrat is permitted to set his own preferred policy, which is a form of optimal delegation.

Delegating pollution permits*

“…The introduction of experts into models of environmental regulation is also done by Porteiro (2008) and Voss and Lingens (2018). Porteiro (2008) focuses on the role of experts in the acquisition of information.…”

“…In contrast, the expert is already informed in our analysis, and we focus on how to use constrained delegation to balance the knowledge and bias of the expert in order to obtain the most efficient regulation. Voss and Lingens (2018) discuss the incentive contract between the government and a biased regulator. In contrast, our focus is on the regulatory contract between the firm and the government, and we discuss how the government hiring a biased expert through constrained delegation can improve on that contract when incentive contracts for the expert are not feasible.…”

Centralization or decentralization? the impact of different distributions of authority on China's environmental regulation

“…Principal-agent theory has been widely applied in research on environmental regulations, and it is used to explain mechanisms to solve information asymmetry in environmental regulation (Voss and Lingens, 2018;Zheng et al, 2017;Zhang, 2015;Gomez and Diego, 2012;Davide et al, 2009). However, the above-mentioned studies mainly focused on a single goal, namely environmental protection, without simultaneously considering another goaleconomic development.…”

“…However, the above-mentioned studies mainly focused on a single goal, namely environmental protection, without simultaneously considering another goaleconomic development. None of these studies took both goals into account when they analyzed how regulators choose coping strategies for multi-object tasks (Voss and Lingens, 2018;Zhang, 2015). This research draws on principal-agent theory to consider how to best achieve two goals (i.e., economic growth and environmental protection) simultaneously in centralized and decentralized authority distribution systems.…”

“…Most previous environmental regulation research that drew on principal-agent theory focused on a single-level principal-agent model, as the researchers assumed that local governments only have a single role as a policy executor (Voss and Lingens, 2018;Zhang, 2015;Laffont and Tirole, 1993). For example, Laffont and Tirole (1993) assumed that local governments are the only supervisors of the implementation of central government policies.…”