REGULATION, MORAL HAZARD AND INSURANCE OF ENVIRONMENTAL RISKS

A large class or major environmental risks are subject to severe moral hazard problems. The purpose of this paper is to study the potential conflicts between cost minimization and safety care. The intuition is that regulatory efforts or sheer competition inducing a greater focus on cost minimization may tilt the agents' trade-off towards taking too much risk. Here we study the problem in the context of regulation of a natural monopoly and see how high powered incentives may conflict with safety care. We address the issue of moral hazard in environmental risk with adverse selection, limited liability, risk aversion and multiprincipals.