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The Principal-Agent Model with Multilateral Externalities: An Application to Climate Agreements

  • Carsten Helm

    ()

    (University of Oldenburg - Public Economics & ZenTra)

  • Franz Wirl

    ()

    (University of Vienna, Center of Business Studies)

We 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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File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2388640
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Paper provided by ZenTra - Center for Transnational Studies in its series ZenTra Working Papers in Transnational Studies with number 32 / 2014.

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Length: 30 pages
Date of creation: Jan 2014
Date of revision: Jan 2014
Handle: RePEc:zen:wpaper:32
Contact details of provider: Postal: 26111 Oldenburg
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Web page: http://www.zen-tra.de/
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