Common agency and pollution control

This paper analyzes, using a modified version of the Laffont & Tirole (1993) model, a framework in which an environmental agency and a public utilities agency regulate production and abatement activities of a polluting Public Utility, either cooperating or acting separetely. When symmetric information about costs is assumed, first best in abatement and cost reducing effort levels is achieved, irrespective of cooperation or separation. When, on the other hand, the firm has an informational advantage, cooperation between regulators leads to the standard L. & T. results, while non-cooperation tighten the trade off between incentives to efficiency and rent extraction, because the environmental regulator's objective function does not account for the public utility's profits. As a result, both cost-reducing effort level and pollution abatement level required from the inefficient type firm are lower if the two regulators act separately.