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Envelope Backs or the Gold Standard? Choosing the Accuracy of Damage Assessment Methods

Government trustees conduct natural resource damage assessments (NRDAs) to hold firms liable for damages caused by their pollution. We analyze a model in which a trustee chooses NRDA accuracy and a firm chooses precaution in response, where increased NRDA accuracy increases expense but decreases the chance that the firm evades damage payment. We find that optimal NRDA accuracy increases with the expected value of the damages. Other results help trustees design welfare-improving regimes to reduce damages from small spills, and identify policy changes and research that can increase social welfare in the NRD arena. (JEL Q51)