European Lifetime Achievement Award in Environmental Economics 2009: Agnar Sandmo

Prof. Agnar Sandmo is the winner of the 2009 edition of the EAERE European Lifetime Achievement Award in Environmental Economics. EAERE has conferred this Award to Prof. Sandmo as a way of public recognition of the strong influence he has has during the last thirty years on economic analysis in general and on environmental economics in particular. We propose below a brief summary of his academic merits as only a sample of such a strong influence.

Agnar Sandmo was born in Norway, 9 January 1938. Since 1971 until his retirement in 2008 he has been Professor of Economics at the Norwegian School of Economics and Business Administration (NHH) in Bergen, Norway.
During his long career, he has held numerous visiting appointments at foreign universities and has acted as a policy advisor to the Norwegian and Swedish Governments and other national and international organizations.
He has also been involved in academic associations as the Econometric Society and the European Economic Association and developed an intense editorial work for a large list of journals highlighting his long collaboration with the Scandinavian Journal of Economics and the Journal of Public Economics, and more recently with the Journal of the European Economic Association.
His extensive dedication to the development of the economic analysis has been recognized with different honours and appointments. In 1976 he was elected fellow of the Econometric Society and in the eighties became elected member of the Norwegian and Swedish Academy of Sciences. In 1990, he was elected president of the European Economic Association, and more recently he received the Norwegian Research Council’s Prize for Outstanding Research.
The Council of the EAERE has decided to add to this list of honours the European Lifetime Achievement Award in Environmental Economics in recognition of his contribution to the development of environmental economics. His contribution has been particularly noteworthy in bringing environmental concerns to the research agenda of mainstream economics, and in demonstrating the suitability of the economic analysis tools in the areas of environmental policy. Agnar Sandmo has made a number of path-breaking contributions to different fields of economics, mainly to the economics of uncertainty, public economics and environmental economics.

Environmental Economics

A summary of his main contributions to our field can be found in his book:
The Public Economics of the Environment, Oxford:OUP, 2000.
Considering the various dimension of environmental quality as public goods, Sandmo identifies the failures of the market mechanism in the face of environmental problems and shows how economic policy should be designed to overcome them. Specific topics covered include the assessment of environmental benefits and costs, the choice between taxes and quotas as policy tools, the principles of environmental taxation in a second-best world and the various notions of the double dividend from environmental tax reform.
Although this book is an excellent summary of his contributions, we would like to mention a pair of papers that have had a tremendous influence on the literature:
Sandmo, Agnar (1972), “Discount Rates for Public Investment Under Uncertainty”, International Economic Review 13:287-302.
Sandmo, Agnar (1975), “Optimal Taxation in the Presence of Externalities”, Swedish Journal of Economics 77:86-98.
In the first paper, the problem of efficient allocation of public and private capital in a world of uncertainty is analyzed within the framework of a general equilibrium model with portfolio decisions and asset markets. From this analysis it is obtained that the public sector’s discount rates should always contain a risk margin and that this margin should correspond to the one used in the private sector for investment in the same risk class.
In the second paper, a first-best solution to the problem of the optimal tax on an externality-generating good is contrasted with the case where the government also needs other, distortionary taxes in order to satisfy its revenue requirements. The main result is that the Pigovian principle holds in a modified form in the latter case as well.
The full impact of these two papers has been building over many years and they continue being a source of inspiration for current research on the social rate of discount and on the double dividend from environmental tax reform.

Public Economics

Besides his influence on the studies of environmental economics, Sandmo has also had a strong influence in other fields very close to the environmental economics as it is the case of the public economics. From his long list of contributions to this field, we would like to highlight the following:
Allingham, Michael G. and Sandmo, Agnar (1972), “Income Tax Evasion: A Theoretical Analysis”, Journal of Public Economics 1:323-338.
Sandmo, Agnar (1981), “Income Tax Evasion, Labour Supply, and the Equity-Efficiency Trade-off”, Journal of Public Economics 16:265-288.

The first paper can be considered a seminal paper on the analysis of the individual taxpayer’s decision on whether and to what extent to avoid taxes by deliberate underreporting.
In the second paper an extension is proposed to incorporate tax evasion into the analysis of optimum income taxation. In this paper Sandmo derives a formula for the optimum marginal tax rate and a characterization of the factors determining the choice between the penalty rate and the probability of detection as instruments for the control of tax evasion. This analysis has become with the pass of time an essential item in any course on public economics or on economics of uncertainty.

Economics of Uncertainty

Finally, a few words to point out that the awardee has also written some relevant papers on the effect of uncertainty on economic decisions. Two excellent papers on this issue are:
Sandmo, Agnar (1970), “The Effect of Uncertainty on Saving Decisions”
Review of Economic Studies 37:353-360.
Sandmo, Agnar (1971), “On the Theory of the Competitive Firm Under Price Uncertainty”
American Economic Review 61:65-73.
In these two papers Sandmo analyses the influence of risk aversion on consumer’s saving decisions and on firm’s production decisions. The two papers are nowadays two classical contributions to the theory of decision under uncertainty.