Optimal Liability Rule in Water Quality Trading Market under Moral Hazard Problem
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This paper aims to find optimal liability rule considering moral hazard issue in the market design for water quality trading and examines how the liability is distributed between buyer and seller depending on their attitude toward risk. In case where buyer (point source polluter) is risk neutral but seller (nonpoint source polluter) is risk averse, there is no case in which buyer and seller share liability. In this case, the buyer who is risk neutral generally pays the full penalty. In case buyer is risk averse but seller is risk neutral, when non-compliance is detected in water quality trading market, there are the following three optimal cases: (ⅰ) seller pays the full penalty, (ⅱ) buyer pays the full penalty, (ⅲ) seller and buyer share the penalty. Finally, when a contract consider an ex post individual rationality condition, buyer pays the full penalty regardless of a degree of seller’s risk aversion.
Abstract
This paper aims to find optimal liability rule considering moral hazard issue in the market design for water quality trading and examines how the liability is distributed between buyer and seller depending on their attitude toward risk. In case where buyer (point source polluter) is risk neutral but seller (nonpoint source polluter) is risk averse, there is no case in which buyer and seller share liability. In this case, the buyer who is risk neutral generally pays the full penalty. In case buyer is risk averse but seller is risk neutral, when non-compliance is detected in water quality trading market, there are the following three optimal cases: (ⅰ) seller pays the full penalty, (ⅱ) buyer pays the full penalty, (ⅲ) seller and buyer share the penalty. Finally, when a contract consider an ex post individual rationality condition, buyer pays the full penalty regardless of a degree of seller’s risk aversion.
참고문헌 (6)
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- Effluent Trading: A Policy Review for Texas, "Vedlitz, A.", Center for PublicLeadership Studies, George Bush School of Government and Public Service, ~ (1999)
- Woodward, R. T., "Market Structures for U.S. Water Quality Trading", Review of Agricultural Economics, 24(2), pp.366~383 (2002)
- WRI Issue Brief, "World Resources Institute", ~, pp.No.1 (2009)