Yolande Hiriart’s research while affiliated with University Bourgogne Franche-Comté and other places

We study the potential conflict between cost minimization and investment in prevention for a risky venture. A natural monopoly is regulated i) for economic purposes; ii) because it can cause losses of substantial size to third parties (the environment or people). The regulator observes the production cost without being able to distinguish the initial type (an adverse selection parameter) from the effort (a moral hazard variable). In addition, the investment in prevention is non observable (another moral hazard variable) and the monopoly is protected by limited liability. We fully characterize the optimal regulation in this context of asymmetric information plus limited liability. We show that incentives to reduce cost and to invest in safety are always compatible. But, in some cases, higher rents have to be given up by the regulator.

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.

Consider the following basic model in economic safety analysis: a firm is willing to invest an amount x in safety measures to avoid an accident A which, in the case of occurrence, leads to a loss of size L. The probability of an accident is a function of x. The optimal value of x is determined by minimizing the expected costs. In the present paper we study this model (and an extended version of it) in an applied risk/safety management setting, which allows for imprecise probabilities for the accident probabilities. The imprecision reflects the fact that the knowledge basis for assigning the probabilities is poor and based on many assumptions, and also that there are different knowledge bases among relevant experts and stakeholders. The purpose of the paper is to present and discuss a set-up for the precise formulation of this type of problems and show how they can be solved. We demonstrate in the paper how an optimal investment level x can be determined under different sets of situations and conditions, including one where a tolerability limit is defined for the accident probability. The main conclusion of the paper is that the robust optimization methods could in practice provide useful decision support but should be supplemented with sensitivity analyses showing the optimal investment levels for various parameter values followed by qualitative analyses providing arguments supporting the different parameter values.

We analyze the regulation of firms that undertake socially risky activities but can reduce the probability of an accident inflicted on third parties by carrying out non verifiable effort. Congress delegates regulation to an agency, although these two bodies may have different preferences toward the industry. The optimal level of discretion left to the agency results from the following trade-off: the agency can tailor discretionary policies to its expert knowledge about potential harm, but it implements policies that are too "pro-industry. "The agency should be given full discretion when the firm is solvent; partial discretion is preferred otherwise. We then investigate how this trade-off changes as the political and economic landscapes are modified.

When a firm undertakes activities which are risky for the environment, the conflict between social and private incentives to exercise safety care requires imposing fines in case a damage occurs. Introducing asymmetric information on the firm's wealth, we show that the fines and probabilities of investigation are systematically too low compared to their optimal level under complete information. This effect is exacerbated when the public agency in charge can no longer commit to an investigation strategy. Compounding asymmetric information with a government failure provides a possible explanation of the significant trend in practice towards a weak enforcement of environmental policies.

We consider a basic model in economic safety analysis: a firm is willing to invest an amount x in safety measures to avoid an accident A, which in the case of occurrence, leads to a loss of size L. The probability of an accident is a function of x. The optimal value of x is determined by minimizing the expected costs. In the paper, we re-examine this model by adopting a practical risk/safety management perspective. We question how this model can be used for guiding the firm and regulators in determining the proper level of investment in safety. Attention is given to issues like how to determine the probability of an accident and how to take into account uncertainties that extend beyond the expected value. It is concluded that the model, with suitable extensions and if properly implemented, provides a valuable decision support tool. By focusing on investment levels and stimulating thereby the generation of alternative risk-reducing measures, the model is considered particularly useful in risk reduction (ALARP) processes.

When a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives and also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare.

Résumé Dans un cadre d’équilibre général à la Heckscher-Ohlin, nous étudions une petite économie ouverte avec trois facteurs de production non mobiles (le capital, le travail et une ressource naturelle), un bien intermédiaire et deux biens finaux. La ressource naturelle sert d’input au secteur intermédiaire. Ce secteur est protégé de la concurrence internationale et régulé à cause de la pollution locale induite par son activité. Les secteurs producteurs de biens finaux (un secteur industriel intensif en capital, un secteur agricole intensif en travail) sont compétitifs et ouverts à la concurrence internationale. Nous caractérisons la régulation optimale du secteur intermédiaire en information parfaite à l’équilibre de cette économie. En adoptant une perspective d’optimum social, nous montrons que l’ouverture aux échanges augmente le bien-être. Nous montrons ensuite que ce résultat standard n’est plus valide en présence d’une asymétrie d’information qui contraint la régulation du secteur intermédiaire. Classification JEL . L51, F18.