Developing Countries and International Environmental Agreements : The Case of Perfect Correlation

Note: The following is a description of the paper and not the actual abstract as it appeared in the print journal. I study the pollution control problem faced by an imperfectly informed supra-national governmental authority (SNGA) that wants to design an international environmental agreement (IEA) for developing countries (DCs). The SNGA can't interact directly with polluting firms in the various DCs. It must interact with such firms through their national governments. Further, because of national sovereignty, the SNGA is unable to either monitor the actions of DC governments and firms or enforce the terms of the IEA in the event of a contractual breach. In this setting, I study the properties of IEAs in which similar DCs are held to similar environmental standards. In particular, I focus on two cases. In case 1, governments and firms within individual DCs do not collude among themselves. In case 2, they do. I show that when the private information of firms and governments across the two DCs is perfectly correlated, whether or not there is collusion, the SNGA can always implement the full information IEA in a Bayesian-Nash equilibrium. This paper tells us (i) that the salience of the monitoring and enforcement problem in such international settings has been exaggerated, and (ii) that technological similarities between DCs have a far greater bearing on the design problem than do the possibly deleterious effects of sovereignty. Indeed, there are a number of situations in which Pareto efficient IEAs can be designed by the SNGA