A note on organizational structure and environmental liability


Franckx L, de Vries FP & White B (2022) A note on organizational structure and environmental liability. Environmental Economics and Policy Studies, 24 (2), pp. 173-193.

This paper employs a multi-task principal-agent model to examine how a corporation’s organizational structure and liability rules for environmental damages affect the incentive schemes offered to managers. We derive environmental liability rules for risk averse managers under two alternative organizational structures: a product-based organization (PBO) and functional-based organization (FBO). For a PBO, it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages; in a FBO it is optimal either to hold the firm liable for environmental damages or, equivalently, to only hold the environmental managers liable for damages. It is also shown that the two organizational structures are equally efficient when there is no correlation between environmental damages from products and no spillover between managerial effort across products or functions. Numerical results further reveal that beneficial spillovers between functions for the same product favours a PBO over a FBO; beneficial spillovers across functions favours a FBO.

Contracts; Multi-task; Principal-agent; Environmental compliance; Environmental liability; Governance framework

Environmental Economics and Policy Studies: Volume 24, Issue 2

Publication date30/04/2022
Publication date online31/07/2021
Date accepted by journal03/07/2021