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Economics Research Institute Study Paper




Utah State University Department of Economics

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In the 1992 Rio Earth Summit, developing countries (DCs) were adamant that in order to protect the environment for the future, new institutions were needed which would channel resources from the wealthy developed countries to the poor DCs. With this backdrop, I analyze the problem faced by an imperfectly informed supranational governmental authority (SNGA) who wishes to design an International Environmental Agreement (lEA). The SNGA cannot contract directly with polluting firms in the various DCs, and he must deal with such firms through their governments. Further, the SNGA is constrained by limited financial resources available for environmental protection. I study this tripartite hierarchical interaction, first for the case in which the relevant DCs are identical; I then analyze the case of heterogeneous DCs. I find that the monetary transfers necessary to induce optimal behavior by governments and firms are quite sensitive to both the timing of the underlying game and to the existence of collusion. Inter alia, my analysis suggests that IEAs are not inherently doomed due to a basic monitoring and enforcement problem arising from national sovereignty. However, the success of such IEAs is contingent on the funds available for global environmental protection.