Separating and Pooling Incentive Mechanisms of Ecological Regulation: The Cases of Developed and Developing Countries

Abstract

A model of contract theory is studied, where the objective functions of a regulation body and firms of two types involve ecological variables. It is shown that the way of working of the regulation mechanism (unifying or pooling) depends on both political conditions (regulators of what type set mechanism and contracts), and on economical conditions (distinction between ”dirty” and ”green” firms in efficiency and a degree of their spreading in the economy). Under small difference in a parameter values characterizing the types of firms it appears that if (what seems to be typical for many developing and transition economies) a use of ”dirty” technologies raises the rentability of firms and the part of ”dirty” firms in economy is great then the pooling (i.e., in some sense, non-market) contract mechanism is chosen more often. Under conditions which seem to be typical for developed countries (relatively more efficient ”green” firms), a choice of separating (in a more degree market) mechanism can be expected.

Keywords:

Menu of contracts, pooling contract, ecological regulation, developed and developing countries