Delegating Pollution Permits

We discuss the decision to delegate the regulation of pollution through sales of permits to abiased expert in a situation where the polluting firm has private information about its technology.We consider, in particular, constrained delegation where the government puts restrictions on theamount of pollution that the expert can sell permits for. We find that there is, in general, moredelegation the higher is the probability of the firm being low-cost. This is not in line with theso-called uncertainty principle, which states that there is more delegation the more uncertaintythe government faces