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The purpose of this study was to design a regulatory policy to solve a nonpoint source (NPS) water pollution problem. Cost-sharing programs of various kinds have dominated NPS policy since the 1980 s. However, such programs are neither efficient nor effective. Economists agree that, in principle, performance-based approaches are preferred to design- based, because they allow firms to choose least-cost abatement practices. However, nonpoint sources are seldom included in performance-based programs since it is very costly to monitor the performance of individual NPS polluters. The NPS pollution problem can be modeled as a generalized principal-agents problem. That is, the principal has to regulate agents while he cannot observe either the types and or the effort level of the agents; only total level of ambient pollution is verifiable. I show that under assumptions consistent with the NPS pollution situation it is possible to decompose the generalized principal-agent problem into two univariate variational problems in the multi-agents case, and to design a two-step contract that solves both the adverse selection and the hidden action problems.

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Helen Pushkarskaya received her Ph.D. at The Ohio State University in 2003 under the supervision of Dr. Allan Randall. Since then she has been working at the University of Kentucky. Her research focuses on individual and group decision-making, and uses various tools from contract theory and mechanism design to lab and field experiments.

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