Modelling of Environmental Risk Management under Information Asymmetry

The Environmental risk management is an important component of governmental environmental policies. Alternative mechanisms for achieving cost-effective environmental risk reduction have been discussed in environmental economics. The paper presents a relatively new approach to environmental risk management - a model of negotiation between polluters and authorities under information asymmetry when also economic instruments are applied. A combinatory model that serves computing the first best solution was developed. The CRAB software (CombinatoRial Auction Body Software System) was used for this model. The computed first best solution was compared to the results of small economic laboratory experiments. Students played the role of the subjects in the experiments. The research concluded that under economic pressure in the form of known limitation of financial resources, the experiment results are closer to minimal financial supports. Even in a one-round game, a more cost-effective solution is achieved compared to experiments where such limitation was not introduced.