Decentralized Enforcement, Sequential Bargaining and the Clean Development Mechanism

While there is a vast literature both on international bargaining and on how international agreements can be enforced, very little work has been done on how bargaining and enforcement interact. An important exception is Fearon (1998), who models international cooperation as a two-stage process, in which the bargaining process is constrained by a need for decentralized enforcement (meaning that the agreement must be enforced by the parties themselves, rather than a third party such as a court). Using the Clean Development Mechanism of the Kyoto Protocol as an example, the present paper proposes a different model of this kind of interaction. This model follows Fearon's in so far as we both use the infinitely repeated Prisoners' Dilemma to capture the enforcement phase of the game. However, while Fearon depicts the bargaining stage as a War of Attrition, the present model sees that stage as a sequential bargaining game of the Ståhl-Rubinstein type. The implications of the present model are compared both to those of the Ståhl-Rubenstein model and to those of the Fearon model. A surprising conclusion is that a need for decentralized enforcement tends to make the bargaining outcome more symmetrical than otherwise. Thus, the impact of bargaining power is actually smaller when the resulting agreement must be enforced by the parties themselves, than it is if enforcement is taken care of by a third party.