Risk Aversion and Compliance in Markets for Pollution Control

This paper examines the effects of risk aversion on compliance choices in markets for pollution control. A firm's decision to be compliant or not is independent of its manager's risk preference. However, noncompliant firms with risk averse managers will have lower violations than otherwise identical firms with risk neutral managers. The violations of noncompliant firms with risk averse managers are independent of differences in their benefits from emissions and their initial allocations of permits if and only if their managers' utility functions exhibit constant absolute risk aversion. However, firm-level characteristics do impact violation choices when managers have coefficients of absolute risk aversion that are increasing or decreasing in profit levels. Finally, in the equilibrium of a market for emissions rights with widespread noncompliance, risk aversion is associated with higher permit prices, better environmental quality, and lower aggregate violations.


Issue Date:
2006
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/14522
PURL Identifier:
http://purl.umn.edu/14522
Total Pages:
21
Series Statement:
ResEc Working Paper 2006-2




 Record created 2017-04-01, last modified 2020-10-28

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