Budget-balancing incentive mechanisms

Joseph A. Herriges, Ramu Govindasamy, Jason F. Shogren

Research output: Contribution to journalArticle

29 Scopus citations


A. P. Xepapadeas [J. Environ. Econom. Management20, 113-26, 1991] developed a pollution abatement incentive mechanism that both reduces the information requirements of a regulator and is "budget-balancing," drawing only on the social gains from pollution abatement to encourage firm compliance. This paper demonstrates that, contrary to Xepapadeas, the budget-balancing system of random penalties cannot be used to induce compliance with the regulator′s objectives if firms are risk neutral. However, the mechanism can be successfully applied if firms are sufficiently risk averse [E. Rasmusen, RAND J. Econom.18, 428-435, 1987].

Original languageEnglish (US)
Pages (from-to)275-285
Number of pages11
JournalJournal of Environmental Economics and Management
Issue number3
StatePublished - Nov 1994

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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