Providing global public goods using monetary deposits: Theory and experiments

Effective international environmental agreements (IEAs) require both meaningful participation and compliance. Most game-theoretic models of IEAs concentrate on the participation decision while assuming full compliance by the members, even when compliance is not an individual best-response. We take a different approach and model an IEA in which the members are free to deviate from their commitments. After demonstrating the need for enforcement, we introduce an institution in which members pay financial deposits that are refunded provided that members satisfy their abatement commitments. We show that in theory, the deposit-refund system can motivate full compliance and lead to more effective IEAs. We then test the theoretical implications using controlled laboratory experiments. We empirically compare the performance of IEAs with mandatory compliance (standard IEA from literature), voluntary compliance and the deposit-refund mechanism. Our empirical results largely support the theoretical predictions — most members violate their agreement without an enforcement mechanism, and IEAs utilizing a deposit-refund can effectively enhance cooperation to provide public goods.