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The principal–agent model with multilateral externalities: An application to climate agreements

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  • Helm, Carsten
  • Wirl, Franz

Abstract

We consider contracting of a principal with an agent if multilateral externalities are present. The motivating example is that of an international climate agreement given private information about the willingness-to-pay (WTP) for emissions abatement. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation. Optimal contracts equalize marginal abatement costs and, thus, can be implemented by a system of competitive permit trading. Moreover, optimal contracts can include a boundary part (i.e., the endogenous, type dependent participation constraint is binding), which is not a copy of the outside option of no contract. Compared to this outside option, a contract can increase emissions of the principal for types with a low WTP, and reduce her payoff for high types. Subsidies can be constant or even decreasing in emission reductions, and turn negative so that the agent reduces emissions and pays the principal.

Suggested Citation

  • Helm, Carsten & Wirl, Franz, 2014. "The principal–agent model with multilateral externalities: An application to climate agreements," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 141-154.
    • Handle: RePEc:eee:jeeman:v:67:y:2014:i:2:p:141-154
    DOI: 10.1016/j.jeem.2013.11.006
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    Citations

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    Cited by:

    1. Gérard Gaudet & Pierre Lasserre, 2015. "The Management of Natural Resources Under Asymmetry of Information," Annual Review of Resource Economics, Annual Reviews, vol. 7(1), pages 291-308, October.
    2. Carsten Helm & Franz Wirl, 2021. "Multitasking: incentivizing agents differing either in their work ethic or intrinsic motivation," Journal of Economics, Springer, vol. 132(1), pages 41-65, January.
    3. Carsten Helm & Franz Wirl, 2016. "Climate Policies with Private Information: The Case for Unilateral Action," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(4), pages 893-916.
    4. Alejandro Caparrós, 2016. "Bargaining and International Environmental Agreements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 5-31, September.
    5. Marcel Franke & Bernhard K. J. Neumärker, 2022. "A Climate Alliance through Transfer: Transfer Design in an Economic Conflict Model," World, MDPI, vol. 3(1), pages 1-14, February.
    6. Kai A. Konrad & Marcel Thum, 2018. "Does a Clean Development Mechanism Facilitate International Environmental Agreements?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(4), pages 837-851, April.
    7. Athanasoglou, Stergios, 2022. "On the existence of efficient, individually rational, and fair environmental agreements," Journal of Mathematical Economics, Elsevier, vol. 98(C).
    8. Antoine Bommier & Amélie Goerger & Arnaud Goussebaïle & Jean-Philippe Nicolaï, 2019. "Altruistic Foreign Aid and Climate Change Mitigation," Working Papers 2019.21, FAERE - French Association of Environmental and Resource Economists.
    9. François Castonguay & Pierre Lasserre, 2016. "Resource Agency Relationship with Privately Known Exploration and Extraction Costs," CIRANO Working Papers 2016s-56, CIRANO.
    10. Habla, Wolfgang & Winkler, Ralph, 2015. "Strategic Delegation and Non-cooperative International Permit Markets," Working Papers in Economics 636, University of Gothenburg, Department of Economics.
    11. Helm, Carsten & Wirl, Franz, 2016. "Multilateral externalities: Contracts with private information either about costs or benefits," Economics Letters, Elsevier, vol. 141(C), pages 27-31.
    12. Thomas Bauer & Franz Wirl, 2021. "Incentivizing by example and money," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 29(1), pages 89-111, March.

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    More about this item

    Keywords

    Private information; Multilateral externalities; Mechanism design; Environmental agreements; Type-dependent outside options;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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