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The Design of Voluntary Agreements in Oligopolistic Markets

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Author Info
Rinaldo Brau ()
C. Carraro

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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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Publisher Info
Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200907.

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Date of creation: 2009
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Handle: RePEc:cns:cnscwp:200907

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Related research
Keywords: Voluntary agreement; voluntary approaches; new policy instruments; environmental regulation; coalition structures; emission standards;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law

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Did you know? Springer Verlag was the first commercial publisher to be listed on RePEc.

This page was last updated on 2009-11-23.

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