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The Design of Voluntary Agreements in Oligopolistic Markets

  • R. Brau

    ()

  • C. Carraro

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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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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  1. Constadina Passa & Anastasios Xepapadeas, 2004. "Participation in and Compliance with Public Voluntary Environmental Programs: An Evolutionary Approach," Working Papers 2004.67, Fondazione Eni Enrico Mattei.
  2. Shameek Konar & Mark A. Cohen, 2001. "Does The Market Value Environmental Performance?," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 281-289, May.
  3. Allen Blackman & James Boyd, 2002. "Tailored Regulation: Will Voluntary Site-Specific Environmental Performance Standards Improve Welfare?," Southern Economic Journal, Southern Economic Association, vol. 69(2), pages 309-326, October.
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  14. Carlo Carraro & Carmen Marchiori & Sonia Oreffice, 2003. "Endogenous Minimum Participation in International Environmental Treaties," Working Papers 2003.113, Fondazione Eni Enrico Mattei.
  15. Na Li Dawson & Kathleen Segerson, 2003. "Voluntary Agreements with Industries: Participation Incentives with Industry-wide Targets," Working papers 2004-06, University of Connecticut, Department of Economics.
  16. Mark Bagnoli & Susan G. Watts, 2003. "Selling to Socially Responsible Consumers: Competition and The Private Provision of Public Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 419-445, 09.
  17. R. Brau & C. Carraro, 2004. "The economic analysis of voluntary approaches to environmental protection. A survey," Working Paper CRENoS 200420, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  18. Thomas P. Lyon & John W. Maxwell, 2007. "Public Voluntary Programs Reconsidered," Working Papers 2007-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
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  20. Michael Hoel & Kerstin Schneider, 1997. "Incentives to participate in an international environmental agreement," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(2), pages 153-170, March.
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  22. Wu, JunJie & Babcock, Bruce A., 1999. "The Relative Efficiency of Voluntary vs Mandatory Environmental Regulations," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 158-175, September.
  23. Farzin, Y H, 2003. "The Effects of Emissions Standards on Industry," Journal of Regulatory Economics, Springer, vol. 24(3), pages 315-27, November.
  24. Bjorner, Thomas Bue & Jensen, Henrik Holm, 2002. "Energy taxes, voluntary agreements and investment subsidies--a micro-panel analysis of the effect on Danish industrial companies' energy demand," Resource and Energy Economics, Elsevier, vol. 24(3), pages 229-249, June.
  25. Suzumura, Kotaro, 1992. "Cooperative and Noncooperative R&D in an Oligopoly with Spillovers," American Economic Review, American Economic Association, vol. 82(5), pages 1307-20, December.
  26. Lyon, Thomas P. & Maxwell, John W., 2003. "Self-regulation, taxation and public voluntary environmental agreements," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1453-1486, August.
  27. Y. Hossein Farzin & Ken-Ichi Akao, 2006. "Environmental Quality in a Differentiated Duopoly," Working Papers 2006.138, Fondazione Eni Enrico Mattei.
  28. Segerson, Kathleen & Miceli, Thomas J., 1998. "Voluntary Environmental Agreements: Good or Bad News for Environmental Protection?," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 109-130, September.
  29. Anna Alberini & Kathleen Segerson, 2002. "Assessing Voluntary Programs to Improve Environmental Quality," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 157-184, June.
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