[Journal:] SPOUDAI - Journal of Economics and Business [ISSN:] 2241-424X [Volume:] 61 [Year:] 2011 [Issue:] 1/2 [Pages:] 80-117
In the present work we try to find out whether the existence of positive international externalities generates an incentive for cooperation between governments and if the adoption of a transfer payments scheme moderates that intensive. We adopt a simple economic model incorporating the international linkage of national economies. Utility proves always to be higher when countries cooperate than when they play Nash to each other. We then add a transfer payment scheme and prove it intensifies the intensive to cooperate, since a moral hazard problem arises on the top of the free riding problem.
Optimal Taxation International Policy Coordination Production Externalities Foreign Aid Intertemporal Choice