Incentive Contracts and Environmental Performance Indicators |
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| Authors: | Peter D. Goldsmith Rishi Basak |
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| Affiliation: | (1) Food and Agribusiness Management Group, The Department of Agricultural and Consumer Economics, The University of Illinois, Urbana, Illinois 61801, USA;(2) Regulatory and Economic Analysis Branch, Economic and Regulatory Affairs Directorate, Environment Canada, 10 Wellington, TLC–22, Hull, Québec, K1A 0H3, Cananda |
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| Abstract: | A principal-agent (P-A) model is used to analyse the effect of environmentaldiligence, the principal (top management), having to use imperfectperformance indicators and fearing penalties for environmental damages,wants to avoid environmental harm and induce the agent (employeemanipulating hazardous materials) to take appropriate action. To motivatethe agent, the principal offers an incentive contract based onenvironmental stewardship performance (as measured by EPI).Environmental stewardship being difficult to measure, due to high levelsof uncertainty surrounding, EPI, creates impediments to the establishmentof an efficient P-A contract. |
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| Keywords: | compliance environmental performance indicators environmental risk incentives output uncertainty principal-agent |
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