Keeping Negotiations in the Dark: Environmental Agreements under Incomplete Information

This paper investigates the role of uncertainty as a tool to support cooperation in international environmental agreements. We consider two layers of uncertainty. Under unilateral uncertainty treaties become successful with positive probability in the signaling game, even under parameter conditions for which no agreement is reached under complete information. Under bilateral uncertainty, a separating equilibrium emerges where the leader participates in the treaty only when its environmental concerns are high. We show that the agreement is signed for larger sets of parameter values under unilateral uncertainty. We then show that further layers of uncertainty might enhance social welfare.Signaling games; Unilaterial uncertainty; Bilateral uncertainty; Non-binding negotiations

Environmental Protection Agencies: Measuring the Welfare Benefits from Regulation under Different Information Contexts

This paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry. We consider complete and incomplete information settings, where potential entrants use the regulator’s tax policy and the incumbent’s output decisions in order to infer the incumbent’s cost structure. When the regulator is absent, we show that firms? entry-deterring practices increase pollution relative to complete information. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information contexts. Our results, therefore, identify under which cases an under-or over-estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact. We also examine how this estimation error increases as firms become more symmetric in their production costs.Entry deterrence; Signaling; Emission fees; Welfare Benefits

When does Disinformation Promote Successful Treaties

This paper analyzes the negotiation of a non-binding treaty where agents are uninformed about each others?ability to comply with the terms of the agreement. We show that the presence of incomplete information allows the treaty to become successful under larger set of parameter conditions than under complete information. The paper also examines the welfare properties of our equilibrium results, showing a welfare improvement relative to complete information under certain conditions. Finally, we extend our analysis to settings where countries?types are correlated, ?nding that the equilibrium outcome where information is conveyed can be supported under larger conditions, whereas equilibria where information is concealed are sustained under a more restrictive set of parameter values.Signaling games; Information transmission; non-binding negotiations; Correlated types

Can Incomplete Information Lead to Under-exploitation in the Commons

This paper analyzes the protection of a common pool resource (CPR) through the manage- ment of information. Speci?cally, we examine an entry deterrence model between an incumbent perfectly informed about the initial stock of a CPR and an uninformed potential entrant. In our model, the appropriation of the CPR by the incumbent reduces both players?future pro?ts from exploiting the resource. In the case of complete information, we show that the incumbent operating in a high-stock common pool overexploits the CPR during the ?rst period since it does not internalize the negative external e¤ect that its ?rst-period exploitation imposes on the en- trant?s future pro?ts. This ine¢ ciency, however, is absent when the common totally regenerates across periods. Under incomplete information, we identify an additional form of ine¢ ciency. In particular, the incumbent operating in a low-stock CPR underexploits the resource in order to signal the low available stock to potential entrants, deterring entry. When the common fully regenerates, we show that such underexploitation becomes more signi?cant since the low-stock incumbent aims to protect its larger monopoly pro?ts.Common Pool Resources; Signaling games; Externalities

The Informative Role of Subsidies

This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only an informative equilibrium can be supported, where information about the incumbent's costs is conveyed to the entrant, but also an uninformative equilibrium, where the actions of regulator and incumbent conceal the monopolist's type, thus deterring entry. While the regulator?s role can support entry-deterrence practices, we demonstrate that his presence is nonetheless welfare improving. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete information environments, and standard entry-deterrence games where the regulator is absent.Entry deterrence; Signaling; Monopoly subsidies

A Tale of Two Externalities: Environmental Policy and Market Structure

This paper examines the two externalities that a country's environmental regulation imposes on other country's welfare: an environmental externality, due to transboundary pollution, and a competitive advantage externality, as regulations affect domestic firms' abatement costs, which impact the profits of their foreign competitors. We first analyze the emission standards that countries independently set under different market structures and then compare them with the standards set under international environmental agreements that internalize one or both types of externalities. The paper hence disentangles the effect of each externality. We show that firms’ profits increase when countries participate in international treaties if the environmental damage from pollution is relatively low and such pollution is not significantly transboundary. We hence demonstrate that international environmental agreements can serve as cooperative devices firms use to ameliorate overproduction and increase profits, without the need to form collusive agreements.Transboundary pollution, strategic environmental policy, international environmental agreement, market structure

Commitment in Environmental Policy as an Entry-Deterrence Tool

This paper investigates under which conditions governments strategically commit to stringent environmental policies in order to protect domestic markets from entry. We compare social welfare under two policy regimes: a ?exible and in?exible environmental policy. We show that commitment becomes socially optimal when its associated welfare loss, due to a stringent fee across time, is smaller than its welfare gain, which arises from an improved environmental quality. Otherwise, the regulator optimally chooses a ?exible environmental policy which cannot credibly deter entry. In addition, we demonstrate that the incentives of the social planner and the incumbent fi?rm are not necessarily aligned regarding entry deterrence. In particular, under certain conditions the regulator ?nds socially optimal to practice entry deterrence whereas the incumbent would actually prefer entry.Entry deterrence, Emission fees, Perfect commitment

Free-riding in International Environmental Agreements: A Signaling Approach to Non-Enforceable Treaties

This paper examines countries’ free-riding incentives in international environmental agreements (IEAs) when, first, the treaty is non-enforceable, and second, countries do not have complete information about other countries’ noncompliance cost. We analyze a signaling model whereby the country leading the negotiations of the international agreement can reveal its own noncompliance costs through the commitment level it signs in the IEA. Our results show that countries’ probability to join the IEA is increasing in the free-riding benefits they can obtain from other countries’ compliance, and decreasing in their own noncompliance costs. This paper shows that, when free-riding incentives are strong enough, there is no equilibrium in which all types of countries join the IEA. Despite not joining the IEA, countries invest in clean technologies. Finally, we relate our results with some common observations in international negotiations.Signaling games, environmental agreements, nonbinding negotiations, noncompliance cost

Entry Deterrence in the Presence of Learning-by-Doing

This paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities.Learning-by-doing, Entry deterrence, Incomplete information, Spillovers

The importance of foregone options

Recent experimental evidence supports the influence of a player's unchosen alternatives in other agent's actions. This paper examines a tractable theoretical model of reference-dependent preferences in which individuals compare other players'chosen action with respect to their un- chosen alternatives. We analyze the equilibrium prediction in complete information sequential- move games, and compare it with that of standard games where players are not concerned about unchosen alternatives. We show that, without relying on interpersonal payo¤ comparisons (i.e., with strictly individualistic agents), our model predicts higher cooperation among the players than standard game-theoretic models. We apply our results in three economic contexts: the labor market gift exchange game, the ultimatum bargaining game, and the sequential public good game. Revised Feb. 2009Unchosen alternatives, Sequential-move games, Relative comparisons, Kindness, Reciprocity.