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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.

Suggested Citation

  • Martimort, David & Sand-Zantman, Wilfried, 2011. "A Mechanism Design Approach to Climate Agreements," TSE Working Papers 11-251, Toulouse School of Economics (TSE), revised 30 Apr 2013.
  • Handle: RePEc:tse:wpaper:24932
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    References listed on IDEAS

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    1. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
    2. 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.
    3. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
    4. Beccherle, Julien & Tirole, Jean, 2011. "Regional initiatives and the cost of delaying binding climate change agreements," Journal of Public Economics, Elsevier, pages 1339-1348.
    5. repec:zbw:hohpro:336-11 is not listed on IDEAS
    6. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    7. Henry Tulkens & Parkash Chander, 1997. "The Core of an Economy with Multilateral Environmental Externalities," International Journal of Game Theory, Springer;Game Theory Society, pages 379-401.
    8. Martimort, David & Moreira, Humberto, 2010. "Common agency and public good provision under asymmetric information," Theoretical Economics, Econometric Society.
    9. Parkash Chander & Henry Tulkens, 1995. "A core-theoretic solution for the design of cooperative agreements on transfrontier pollution," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 279-293.
    10. Hans Gersbach & Ralph Winkler, 2007. "On the Design of Global Refunding and Climate Change," CER-ETH Economics working paper series 07/69, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich, revised Jul 2007.
    11. Jacques Durieu & Hans Haller & Nicolas Querou & Philippe Solal, 2008. "Ordinal Games," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 177-194.
    12. Carsten Helm & Franz Wirl, 2011. "International Environmental Agreements: Incentive Contracts with Multilateral Externalities," Working Papers V-336-11, University of Oldenburg, Department of Economics, revised Jun 2011.
    13. Hans Gersbach & Noemi Hummel & Ralph Winkler, 2011. "Sustainable Climate Treaties," CER-ETH Economics working paper series 11/146, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    14. Beccherle, Julien & Tirole, Jean, 2011. "Regional initiatives and the cost of delaying binding climate change agreements," Journal of Public Economics, Elsevier, pages 1339-1348.
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    Citations

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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. Eskander, Shaikh & Janus, Thorsten & Barbier, Edward, 2016. "Linking The Unlinked: Transboundary Water-Sharing Under Water-For-Leverage Negotiations," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235650, Agricultural and Applied Economics Association.
    3. 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.
    4. Aurélie Slechten, 2015. "Environmental agreements under asymmetric information," Working Papers 95042257, Lancaster University Management School, Economics Department.
    5. Alexey Kushnir & Shuo Liu, 2015. "On the equivalence of bayesian and dominant strategy implementation: the case of non-linear utilities," ECON - Working Papers 212, Department of Economics - University of Zurich.
    6. Christian Gollier and Jean Tirole, 2015. "Negotiating effective institutions against climate change," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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