Toward a Political Theory of the Emergence of Environmental Incentive Regulation

This article makes some steps toward a formal political economy of environmental policy. Economists' quasi-unanimous preference for sophisticated incentive regulation is reconsidered. We recast the question of instrument choice in the general mechanism design literature within an incomplete contract approach to political economy. We show why "constitutional" constraints on the instruments of environmental policy may be desirable, even though they appear inefficient from a standard economic viewpoint. Their justification lies in the limitations they impose on the politicians' ability to distribute rents. Insights are provided on the emergence of incentive mechanisms in environmental regulation.