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Economics Research Institute Study Paper




Utah State University Department of Economics

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I study the pollution control problem faced by an imperfectly informed supranational governmental authority (SNGA) that wishes to design an international environmental agreement (lEA) for developing countries (DC). The SNGA cannot contract directly with polluting firms in the various DCs; it must deal with such firms through their national governments. Further, owing to national sovereignty, the SNGA is unable to either monitor the actions of DC governments and firms or enforce the terms of the lEA in the event of a contractual breach. In this setting, I study the properties of equitable lEAs in which similar DCs are held to similar environmental standards. In particular, I focus on two cases. In the first case, governments and firms within individual DCs do not collude among themselves, and, in the second case, they do. I show that when the private information of firms and governments across the two DCs is perfectly correlated, whether or not there is collusion, the SNGA can always implement the full information lEA in a Bayes-Nash equilibrium. My analysis tells us that (i) the significance of the monitoring and enforcement problem in such international settings has been exaggerated, and (ii) the technological similarities between DCs have a far greater bearing on the design problem than do the potentially deleterious effects of sovereignty. Indeed, there are a number of situations in which Pareto-efficient lEAs can be designed by the SNGA.