Environmental Regulation in the Shadow of International Trade Law: A Principal-Agent Analysis

While environmental regulations can serve a valuable societal purpose, they also enable hidden protectionism. I analyze a principal-agent model of environmental regulation wherein citizens are the uninformed principal and government is the informed agent. In the model, import competitors may acquire protectionist benefits from stringent environmental regulations because foreign imports could potentially cause environmental damage. The analysis shows that while international trade law can constrain environmental regulations, it can also sometimes increase the level of environmental regulation if the citizens are sufficiently worried about the effect of protectionism on consumer prices. Additionally, international trade law will be beneficial to the citizens whenever it does not invalidate too many environmental regulations.