Constitutional Choice, Federal Grants, and International Environmental Agreements?1

1We have benefited from discussions at the workshop on “Institutional Design of Fed-eral Systems: Theory and Empirical Evidence ” in Bonn and at conferences in Dresden and St. Gallen. We also gratefully acknowledge financial support of the Deutsche Forschungs-gemeinschaft (German Research Foundation) through SPP 1422. In this paper, we analyze how the prospect of international negotiations over trans-boundary pollution shape the countries ’ constitutional and political decisions that precede the bargaining process. We show that the countries ’ dominant strategy at the constitutional stage is to assign the authority over environmental policy and in-ternational negotiations to the governments of the polluting regions. Although this decentralization of power is usually accompanied by federal grant schemes, there is no ‘fair ’ cost sharing within each country. The negotiating regions ’ shares of the national benefits falls short of the corresponding shares of costs. This depresses the bargaining incentives of the regional negotiators and leads to a suboptimal interna-tional environmental agreement from the perspective of the countries as a whole