The Principal-Agent Model with Multilateral Externalities: An Application to Climate Agreements
AbstractWe consider contracting of a principal with an agent if multilateral externalities are present. The motivating example is that of an interna- tional climate agreement given private information about the willingness- to-pay (WTP) for emissions abatement. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation. Optimal contracts equalize marginal abatement costs and, thus, can be implemented by a system of competitive permit trading. Moreover, optimal contracts can include a boundary part (i.e., the endogenous, type dependent participation constraint is binding), which is not a copy of the outside option of no contract. Compared to this outside option, a contract can increase emissions of the principal for types with a low WTP, and reduce her payo§ for high types. Subsidies can be constant or even decreasing in emission reductions, and turn negative so that the agent reduces emissions and pays the principal.
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Bibliographic InfoPaper provided by ZenTra - Center for Transnational Studies in its series ZenTra Working Papers in Transnational Studies with number 32 / 2014.
Length: 30 pages
Date of creation: Jan 2014
Date of revision: Jan 2014
private information; multilateral externalities; mecha- nism design; environmental agreements; type-dependent outside options;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-08 (All new papers)
- NEP-CTA-2014-02-08 (Contract Theory & Applications)
- NEP-ENE-2014-02-08 (Energy Economics)
- NEP-ENV-2014-02-08 (Environmental Economics)
- NEP-ORE-2014-02-08 (Operations Research)
- NEP-RES-2014-02-08 (Resource Economics)
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