Incentive contracts and environmental performance indicators

Peter D. Goldsmith, Rishi Basak

Research output: Contribution to journalArticle

Abstract

A principal-agent (P-A) model is used to analyse the effect of environmental diligence, the principal (top management), having to use imperfect performance indicators and fearing penalties for environmental damages, wants to avoid environmental harm and induce the agent (employee manipulating hazardous materials) to take appropriate action. To motivate the agent, the principal offers an incentive contract based on environmental stewardship performance (as measured by EPI). Environmental stewardship being difficult to measure, due to high levels of uncertainty surrounding, EPI, creates impediments to the establishment of an efficient P-A contract.

Original languageEnglish (US)
Pages (from-to)259-279
Number of pages21
JournalEnvironmental and Resource Economics
Volume20
Issue number4
DOIs
StatePublished - Dec 1 2001

Keywords

  • Compliance
  • Environmental performance indicators
  • Environmental risk
  • Incentives
  • Output uncertainty
  • Principal-agent

ASJC Scopus subject areas

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

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