Inconsistent preferences in environmental protection investment and the central government's optimal policy

Abstract

Environmental protection plans cannot succeed without full cooperation among related units. However, inconsistent investment preferences toward environmental protection increase the damage to the environment. This article employs the contract mechanism to analyse environmental protection effects when the central government directly subsidizes the local governments. The results reveal that subsidies from the central government are not only unable to solve the problem of the inconsistent investment preferences among the central and local governments but also induce the free-riding behaviour of local governments. Because of the free-riding behaviour of the local governments, there is no such equilibrium in which the central government prefers the sequential investment mode while the local governments prefer the simultaneous investment mode.

Acknowledgements

The first author gratefully acknowledges the financial support provided by Taiwan's National Science Council (NSC 95-2415-H-424-001).

Notes

¹ Smirnov and Wait (2004a) used a similar function to analyse the optimal collaborative investment-timing and the influence of the hold-up problem on the social welfare. The setup for their function was E = Σβ_i ln m_i , where i = A or B.