TY - UNPB

T1 - Environmental agreements under asymmetric information

AU - Slechten, Aurélie

PY - 2015/10

Y1 - 2015/10

N2 - In a two-country model, I analyze international environmental agreementswhen a country's emission abatement costs are private information and participation to an agreement is voluntary. I show that the presence of asymmetric information may prevent countries from reaching a first-best agreement if this information asymmetry is too high. I propose a new channel to restore the feasibility of the first-best agreement: pre-play communication. By revealing its abatement cost through a certification agency in a pre-play communication stage, a country commits not to misreport this abatement cost during the negotiations of an agreement. Hence, following certification by at least one country, information asymmetry is reduced. Certification restores the feasibility of the first-best agreement except for intermediate levels of information asymmetry. For those levels, one country undergoing certification is not always sufficient to restore the feasibility of the first-best but it is impossible to find transfers between countries such that they both optimally accept to undergo certification. One country has always an incentive to free-ride on the other country's certification.

AB - In a two-country model, I analyze international environmental agreementswhen a country's emission abatement costs are private information and participation to an agreement is voluntary. I show that the presence of asymmetric information may prevent countries from reaching a first-best agreement if this information asymmetry is too high. I propose a new channel to restore the feasibility of the first-best agreement: pre-play communication. By revealing its abatement cost through a certification agency in a pre-play communication stage, a country commits not to misreport this abatement cost during the negotiations of an agreement. Hence, following certification by at least one country, information asymmetry is reduced. Certification restores the feasibility of the first-best agreement except for intermediate levels of information asymmetry. For those levels, one country undergoing certification is not always sufficient to restore the feasibility of the first-best but it is impossible to find transfers between countries such that they both optimally accept to undergo certification. One country has always an incentive to free-ride on the other country's certification.

KW - environmental agreements

KW - Asymmetric information

KW - certification

KW - information disclosure

M3 - Working paper

T3 - Economics Working Paper Series

BT - Environmental agreements under asymmetric information

PB - Lancaster University, Department of Economics

CY - Lancaster

ER -