This paper analyzes policies for regulating polluting firms under imperfect monitoring. The main finding is that a certain emission target is always more costly to enforce if there exists a market for emission permits than if there is none. The intuition is that a market restricts the regulatory...

The shirking model of efficiency wages has been thought to imply that monitoring and pay are substitute instruments for motivating workers. We demonstrate that this result hinges critically on restrictive assumptions regarding workers' choice of effort - for example that there are only two...