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Appears in Collections:Economics Working Papers
Peer Review Status: Unrefereed
Title: A Note on Organizational Design and the Optimal Allocation of Environmental Liability
Author(s): Franckx, Laurent
de Vries, Frans
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Citation: Franckx L & de Vries F (2012) A Note on Organizational Design and the Optimal Allocation of Environmental Liability. Stirling Economics Discussion Paper, 2012-09.
Keywords: contracts
vicarious liability
JEL Code(s): K30: Other Substantive Areas of Law: General
L20: Firm Objectives, Organization, and Behavior: General
Q20: Renewable Resources and Conservation: General
Issue Date: 31-May-2012
Date Deposited: 7-Jun-2012
Publisher: Stirling Management School
Series/Report no.: Stirling Economics Discussion Paper, 2012-09
Abstract: A multi task principal-agent model is employed to derive optimal environmental liability rules for risk neutral managers under two alternative organizational structures - a functional organization and a product-based organization. For a product-based organization it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages. In a functional organization it is optimal either to hold the firm liable for environmental damages or, equivalently, not to hold the production managers liable for environmental damages. We derive conditions to obtain the first-best solution for a given organizational structure. Finally, the organizational form that induces the highest environmental effort induces the lowest production effort and vice versa. This suggests that production and environmental protection are substitutes rather than complements.
Type: Working Paper
Affiliation: Flemish Institute for Technological Research (VITO), Belgium

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