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Working Paper: The Impact of Imperfect Information on the Transactions of Contaminated Properties

Paper Number: 2007-03

Document Date: 01/2007

Author(s): Jeffrey Zabel

Subject Area(s): Hazardous Waste, Land Use, Benefit-Cost Analysis

Keywords: land cleanup; reuse; brownfields; asymmetric information; market for lemons

Abstract: The well documented existence of hundreds of thousands of contaminated properties is a major environmental problem in the United States. Recently, there has been a lot of discussion in the academic literature and political arena about the benefits of the redevelopment of contaminated sites. Given that there may be positive net benefits, why is it that these sites have not been clean up and redeveloped? The focus of this paper is analyzing how incomplete information can deter the transactions of contaminated sites. First, a model of contaminated property transactions is developed. Second, the concept of incomplete information is defined and applied to this model. It is then shown how incomplete information can deter socially optimal transactions of contaminated properties. Third, a framework for empirically estimating the impact of incomplete information on property transactions is developed. Fourth, a framework for measuring the associated welfare loss from the reduced rate of property transactions is established. Fifth, recommendations about how to proceed in this relatively new area of research are provided, particularly with respect to estimating the empirical model.

This paper is part of the Environmental Economics Working Paper Series.

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