Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155161
Authors: 
Millock, Katrin
Salanié, François
Year of Publication: 
2000
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 108. 2000
Abstract: 
Collective environmental agreements (CEAs) refer to agreements negotiated between a group of polluting firms and a public regulatory body. The article analyses some potential problems with CEAs. First, we study free-riding. We show how the incentive constraint imposed by moral hazard determines the maximum feasible emission reduction under a CEA. When firms are short sighted, free-riding seriously undermines the effectiveness of a CEA. Adding uncertainty about environmental damage or future government action makes it even harder to satisfy the moral hazard constraint. Second, we show that cooperation on a different activity can reduce the incentives to free-ride, since firms can threaten to stop cooperating in order to deter deviations. This effect could explain why some CEAs may be successful. However, we also show that reciprocally the adoption of a CEA increases the possibilities for cooperation on other activities. This might be socially harmful if it translates into price collusion, for example. Finally, we explore the issue of how firms might allocate the abatement effort toward the collective target. We show that a CEA can help firms to coordinate on a reduction of quantity and a consequent price increase in order to benefit from implicit cartel profits. Our findings thus provide some cautionary arguments against the use of CEAs.
Subjects: 
Voluntary agreements
free-riding
collusion
cost-effectiveness
JEL: 
D62
L51
Q28
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.