Negotiation versus manipulation: The impact of alternate forms of LDC government behavior on the design of international environmental agreements

This article addresses the problem faced by an asymmetrically informed supra-national governmental authority (SNGA) with limited funds that wishes to design an international environmental agreement (IEA) for less developed countries (LDCs). The SNGA can only deal with polluting firms in the LDCs through their national governments, This tripartite hierarchical interaction is studied for two LDCs, The private information of the firms and the governments across the two countries is perfectly correlated. In this setting, we study the effects of two kinds of behavior by the governments of the LDCs, We show that despite the perfect correlation in the private information of governments and firms across the two countries, the SNGA cannot design a first-best IEA. Our analysis suggests that problems arising from the SNGA's inability to monitor the actions of the polluting firms and the national governments are less salient than is commonly believed. However, there is no denying the fact that the success of IEAs is dependent not only on the funds available for environmental protection, but also on the manner in which LDC governments represent polluting firms in their countries. JEL classification: H77, O38, Q25.