Making Excessive Emission Harder : Information Frictions, Retaliation, and Intervention

This paper establishes a game among a government, a firm, and public supervisors. The government aims to reduce the firm's excessive emission, but it can not observe it. The government's intervention is based on reports from public supervisors. The friction is that the firm can stop public supervisors from reporting honestly by a retaliation strategy conditional on intervention. A very responsive government intervention strategy provides informative signals to the firm. A good intervention strategy should not be completely responsive, meaning it can hide part of the information sent by public supervisors. Our model demonstrates that even if public supervisors' reports are not verifiable, it is possible to reduce the equilibrium excessive emission to a certain level. Based on public supervisors' reports, the government can reduce the aggregate excessive emission and protect the public supervisors by increasing the probability of intervention with or without reports by the same ratio