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Developing Countries and Environmental Protection: Contract Design in Perfectly Correlated Environments

  • Amitrajeet Batabyal


I study the problem faced by an asymmetrically informed supranational governmental authority (SNGA) with limited funds that wishes to design an international environmental agreement (IEA) for less developed countries (LDCs). The SNGA cannot contract directly with polluting firms in the various LDCs, but it must deal with such firms through their national governments. I study this tripartite hierarchical interaction for two LDCs. My principal result is that despite the perfect correlation in the private information of the governments and the firms across the two countries, and in contrast with the result contained in Batabyal (1998a), the SNGA cannot implement a first-best IEA. Copyright Kluwer Academic Publishers 1999

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 10 (1999)
Issue (Month): 3 (July)
Pages: 305-323

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Handle: RePEc:kap:openec:v:10:y:1999:i:3:p:305-323
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  1. Sappington, David & Demski, Joel S., 1983. "Multi-agent control in perfectly correlated environments," Economics Letters, Elsevier, vol. 13(4), pages 325-330.
  2. Batabyal, Amitrajeet A., 1998. "On the irrelevance of collusion in perfectly correlated environments," International Review of Economics & Finance, Elsevier, vol. 7(4), pages 393-405.
  3. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  4. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-94, Supplemen.
  5. Batabyal, Amitrajeet A., 1998. "Developing countries and international environmental agreements: The case of perfect correlation," International Review of Economics & Finance, Elsevier, vol. 7(1), pages 85-102.
  6. Jean Tirole, 1988. "The Multicontract Organization," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 459-66, August.
  7. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
  8. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
  9. Batabyal, Amitrajeet A., 1996. "Developing Countries and Environmental Protection: The Effects of Budget Balance and Pollution Ceiling Constraints," Working Papers 9617, Utah State University, Department of Economics.
  10. Michael Hoel, 1992. "International environment conventions: The case of uniform reductions of emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(2), pages 141-159, March.
  11. Bernauer, Thomas, 1995. "The effect of international environmental institutions: how we might learn more," International Organization, Cambridge University Press, vol. 49(02), pages 351-377, March.
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