Nonpoint Source Pollution and Optimal Regulation

This paper analyzes effects of nonpoint source pollution on regulation optimal contracts in asymmetric information situation. We consider a continuum of agents (to formalize major characteristic of nonpoint source pollution) which pollute another agent (affected agent). We distinguish different forms of externalities and examine if it is always necessary to modify optimal contract of each responsible agent and also, optimal contract of affected agent (as this is the case with point source pollution). We show that it is not and in cases where contracts must be changed, we explain why and how they must be distorted.