A Mechanism Design Approach to Climate-Change Agreements

We take a mechanism design perspective to investigate how environmental agreements should account for multilateral externalities, incentive compatibility, and voluntary participation by sovereign countries. The optimal mechanism involves a tradeoff between a free rider problem in the effort provision of participating countries and the necessity of inducing countries to ratify the agreement. This mechanism can be approximated by a simple menu with attractive implementation and robustness properties. Limits on enforcement and commitment might nevertheless hinder the performance of this menu, making the “business as usual” scenario more likely.

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