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A Mechanism Design Approach to Climate Agreements

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  • Martimort, David
  • Sand-Zantman, Wilfried

Abstract

We analyze environmental agreements in contexts with asymmetric information, voluntary participation by sovereign countries and possibly limited enforcement. Taking a mechanism design perspective, we study how countries can agree on effort levels and compensations to take into account multilateral externalities. We delineate conditions for efficient agreements and trace out possible inefficiencies to the conjectures that countries hold following disagreement. We show how optimal mechanisms admit simple approximations with attractive implementation properties. Finally, we also highlight how limits on commitment strongly hinder performances of optimal mechanisms.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 682.

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Date of creation: 31 Aug 2011
Date of revision: 30 Apr 2013
Handle: RePEc:ide:wpaper:24929

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  1. Ray, D. & Vohra, R., 1993. "Equilibrium Binding Agreements," Papers 21, Boston University - Department of Economics.
  2. Parkash Chander & Henry Tulkens, 1995. "A core-theoretic solution for the design of cooperative agreements on transfrontier pollution," International Tax and Public Finance, Springer, vol. 2(2), pages 279-293, August.
  3. Baliga, Sandeep & Maskin, Eric, 2003. "Mechanism design for the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 7, pages 305-324 Elsevier.
  4. Chander, P. & Tulkens, H., . "The core of an economy with multilateral environmental externalities," CORE Discussion Papers RP -1276, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Makowski Louis & Mezzetti Claudio, 1994. "Bayesian and Weakly Robust First Best Mechanisms: Characterizations," Journal of Economic Theory, Elsevier, vol. 64(2), pages 500-519, December.
  6. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
  7. Black, Philip & Calitz, Estian & Steenekamp, Tjaart & Siebrits, Krige (ed.), 2011. "Public Economics," OUP Catalogue, Oxford University Press, edition 5, number 9780195995152, September.
  8. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  9. Theodore Groves & John Ledyard, 1976. "Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem'," Discussion Papers 144, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Laffont, Jean-Jacques & Martimort, David, 2005. "The design of transnational public good mechanisms for developing countries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 159-196, February.
  11. Martimort, David & Stole, Lars, 2011. "Public Contracting in Delegated Agency Games," MPRA Paper 32874, University Library of Munich, Germany.
  12. Neeman, Zvika, 1999. "Property Rights and Efficiency of Voluntary Bargaining under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 679-91, July.
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Cited by:
  1. David Martimort & Wilfried Sand-Zantman, 2013. "Solving the global warming problem: beyond markets, simple mechanisms may help!," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 361-378, May.
  2. Helm, Carsten & Wirl, Franz, 2014. "The principal–agent model with multilateral externalities: An application to climate agreements," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 141-154.

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