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The design of voluntary agreements in oligopolistic markets

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  • Rinaldo Brau

    ()

  • Carlo Carraro

    ()

Abstract

This paper analyses the conditions under which a group of firms is incentivised to sign a voluntary agreement (VA) to control polluting emissions even in the presence of free-riding by other firms in the industry. We consider a policy framework in which firms in a given industry decide whether or not to sign a VA proposed by an environmental regulator. We identify the features that a VA should possess in order to incentivize firms to participate in the VA and to enhance its economic and environmental effectiveness. Under very general conditions on the shape of the demand schedule, we obtain the following results. First, a VA does not belong to the equilibrium of the coalition game when benefits from voluntary emission abatement are a pure public good. Second, in the presence of partial spillovers – i.e. when signatories obtain more benefits from the VA than non-signatories – a VA belongs to the equilibrium only if a minimum participation rule is guaranteed. Third, a VA with a minimum participation rule and a minimum mandatory emission abatement may improve welfare (and even industry profits) compared to a VA in which firms are free to set their own profit maximising abatement level.

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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 39 (2011)
Issue (Month): 2 (April)
Pages: 111-142

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Handle: RePEc:kap:regeco:v:39:y:2011:i:2:p:111-142

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Web page: http://www.springerlink.com/link.asp?id=100298

Related research

Keywords: Voluntary agreement; Voluntary approaches; New policy instruments; Environmental regulation; Coalition structures; Emission standards; K32; D21; Q58;

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Citations

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Cited by:
  1. Ryo Ishida & Takuro Miyamoto, . "Does an Optimal Voluntary Approach Flexibly and Efficiently Control Emissions from Heterogeneous Firms?," Discussion papers ron257, Policy Research Institute, Ministry of Finance Japan.
  2. Michael Cohen & Rui Huang, 2012. "Corporate Social Responsibility for Kids’ Sake: A Dynamic Model of Firm Participation," Working Papers 12, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  3. Michael Cohen & Rui Huang & Chen Zhu, 2012. "The Use of Voluntary Marketing Initiatives to Improve the Nutritional Profile of Kids Cereals," Working Papers 11, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  4. R. Brau & C. Carraro, 2004. "The economic analysis of voluntary approaches to environmental protection. A survey," Working Paper CRENoS 200420, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  5. Fabio Sferra & Massimo Tavoni, 2013. "Endogenous Participation in a Partial Climate Agreement with Open Entry: A Numerical Assessment," Working Papers 2013.60, Fondazione Eni Enrico Mattei.

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