Slechten, Aurélie (2015) Environmental agreements under asymmetric information. Working Paper. Lancaster University, Department of Economics, Lancaster.
Abstract
In a two-country model, I analyze international environmental agreements when 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.