Stable Environmental Agreements and International Trade in Asymmetric Oligopoly Markets

This chapter analyzes the stability of international environmental agreements between heterogeneous countries in the context of free trade. For this purpose, we develop a simple model of international trade with three countries of unequal market size. Strategic interactions between countries come from the imperfect competition among producers in the integrated market and from the transboundary pollution generated by the firms. To capture efficiency gains from coordinating policies, countries can participate to an international environmental agreement, which is modeled as a simple coalition formation game. We show that a global agreement is less likely to form if a sub-global agreement between two countries is already in place. Interestingly, the global agreement may be blocked by either the outsider or by the participants to the sub-global agreement