INSTRUMENT CHOICE WHEN REGULATORS AND FIRMS BARGAIN

We compare outcomes with an emissions tax and an emissions standard wh en a firm and regulator engage in cooperative bargaining over the stri ngency of the regulation. Bargaining is motivated by giving the firm a choice of abatement technologies. If the firm's preferred technology differs from the regulator's, the first-best outcome is not an equilib rium of the traditional noncooperative game in which the regulator is a Stackelberg leader. The regulator may therefore choose to offer the firm a more lenient regulation if it agrees to switch technologies. We find that the resulting bargaining outcomes differ for a tax and a st andard even though information is symmetric, and we identify condition s under which each instrument yields lower social costs. (C) 1998 Acad emic Press.