Regulating Altruistic Agents

Altruism or ‘regard for others’ can encourage self-restraint among generators of negative externalities, thereby mitigating the externality problem. We explore how introducing impure altruism into standard regulatory settings alters regulatory prescriptions. We show that the optimal calibration of both quantitative controls and externality taxes are affected. It also leads to surprising results on the comparative performance of instruments. Under quantity-based regulation welfare is increasing in the propensity for altruism in the population; under price-based regulation the relationship is nonmonotonic. Price-based regulation is preferred when the population is either predominantly altruistic or predominantly selfish, quantity-based regulation for cases in between. JEL Codes: D62, D64, H42 ∗We thank Karine Nyborg, Arun Malik, John List, Colin Rowat, Ron Smith, Tim Swanson, and seminar participants at Birmingham, UCL, Toulouse and Heidelberg universities for very valuable comments. All errors are ours. †Department of Economics, Malet St, London WC1E 7HX, United Kingdom. email : [email protected]