DP2571 Liability for Past Environmental Contamination and Privatization

Author(s): Dietrich Earnhart
Publication Date: September 2000
Keyword(s): Environmental Contamination, Liability, Privatization, Risk
JEL(s): D80, K32
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2571

This paper examines the role of liability for past environmental contamination in the privatization processes of Central and Eastern Europe. The theoretical section establishes a link between a risk-averse investor?s amount of information regarding the extent of past environmental contamination (and its cleanup costs) and the investor?s willingness to pay for a particular enterprise, i.e., bid. As the investor obtains a more precise estimate of the uncertain cleanup costs, the investor faces less risk; therefore, the investor?s risk premium falls and the investor?s bid rises. This link generates four hypotheses regarding a privatization agency?s responses to the investor?s knowledge of cleanup costs. The empirical section of this paper proposes to test these hypotheses with forthcoming analysis using data from the Czech Republic.