Title: The Law and Economics of Environmental Contracts
Abstract:This paper develops a simple economic framework that is used to explain and critique the recent trend favoring site-specific contractual commitments in environmental regulation. Such contracts typical...This paper develops a simple economic framework that is used to explain and critique the recent trend favoring site-specific contractual commitments in environmental regulation. Such contracts typically involve an exchange under which the regulator relaxes ostensibly inflexible uniform environmental regulations and allows development to proceed upon the condition that the developer complies with the negotiated, site specific requirements. The developer gets a formal, explicit promise from regulators that they will not impose any further requirements for some fixed period. The paper surveys some important recent instances of such agreements ? habitat conservation plans under the Endangered Species Act, Brownfields redevelopment agreements, EPA?s Project XL, and in-lieu-fee wetlands mitigation. It then argues that these agreements make three shifts in environmental regulatory policy: 1) a substantive shift to focus on outcomes ? such as ecosystem value and risk reduction ? as opposed to inputs; 2) a process shift under which the role of national interest groups is reduced; and 3) the use of potential legal liability as a way of committing regulators not to renegotiate in the future. The (informal) model of the paper views regulatory contracts as negotiated in the shadow of the credible default regulatory outcome, which it takes as itself the product of bargaining. This model immediately implies that if the contractual bargaining environment does not differ from the default regulatory bargaining environment then environmental contracts will simply replicate default regulatory outcomes. Borrowing from the economic theory of private contracts suggests that key determinants of the social desirability of regulatory contracts will include: 1) the relative information available to the parties at the time the contract is negotiate, and, 2) the identify of the parties to the contract ? whether they are sufficiently representative to lower the likelihood of inefficient externalization under the contract. Moreover, unlike private contracts, a party to the contract ? the regulator (generically) ? also determines the present default regulatory outcome, but is likely not the agent in control of future regulation.Read More
Publication Year: 2000
Publication Date: 2000-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 3
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