Environmental Agreements under Asymmetric Information

Slechten, Aurelie (2020) Environmental Agreements under Asymmetric Information. Journal of the Association of Environmental and Resource Economists, 7 (3). pp. 455-481. ISSN 2333-5955

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Abstract

In a two-country model, I investigate the role of a pre-negotiation phase as an information-sharing and certification device to restore the feasibility of an efficient environmental agreement when countries' abatement costs are private information and participation is voluntary. When uncertainty regarding abatement costs is high, the welfare gains of reducing information asymmetries and reaching the first-best agreement will be sufficiently large to design budget-balanced transfers that compensate both countries for the loss of the information rent they could obtain by staying privately informed. Both countries then accept to share and certify their abatement costs during the pre-negotiation phase.