International environmental agreements for local and global pollution

Increasing concerns about climate change have given rise to the formation of International Environmental Agreements (IEAs) as a possible solution to limit global pollution effects. In this paper, we study the stability of IEAs in a repeated game framework where we restrict to strategies which are simple and invariant to renegotiation. Our main contribution is that we characterize necessary and sufficient conditions for stability of an IEA when pollution has both a global and local effect. Local pollution spillovers are represented by a network structure. We find that stable IEAs exist if the network structure is balanced. Too large asymmetries in the degree of local spillovers may, however, lead to non-existence of stable structures. We also discuss the implications of our results for welfare. The generality of our approach allows for several applications, in particular the provision of public goods.

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