Developing Countries and Environmental Protection : The Effects of Budget Balance and Pollution Ceiling Constraints

The following is a description of the paper, and not the actual abstract as it appeared in the journal. In this paper we analyze the problem faced by an asymmetrically informed supra-national governmental authority (SNGA) who wishes to design an International Environmental Agreement (IEA). We study the tripartite hierarchical interaction between the SNGA and developing country governments and polluting firms. We find that the monetary transfers necessary to induce optimal behavior by governments and firms are not very sensitive to the presence of potential government/firm collusion. However, because the optimal IEAs satisfy budget balance and because there is a ceiling on the amount of pollution reduction that an IEA can require, the level and pattern of pollution abatement are not ideal. The analysis of this paper suggests that IEAs are not doomed due to the monitoring and enforcement problem stemming from national sovereignty. However, the success of the designed IEAs is dependent on the funds available for environmental protection and the pollution reduction ceiling negotiated by the SNGA and developing country governments