Bargaining in environmental regulation revisited

Abstract

We explore the possibility that firms and regulators achieve cooperative agreements in environmental regulation. We show that it is possible that firms choose cleaner technologies in exchange for reductions of the fines for non-compliance with environmental standards. Interestingly, the likelihood of achieving these agreements depends negatively on the monitoring costs, positively on the external damages, and non-monotonically on the differences among the eligible technologies and the maximum sanctions for violating the standards.