Bilateral international agreement, cooperation and reneging

We consider two democratic countries, where each of country's government has to decide whether to sign a bilateral agreement to produce a public good where both countries' citizens will benefit. The production cost is funded by tolls charged by each country to those citizens who are using the public good. The bilateral agreement can be based on two alternatives: (i) a non-cooperative agreement and (ii) a cooperative agreement. Both alternatives have the same constraint of the status-quo i.e. at least half of the citizens must be satisfied with the agreement so that ruling party can ensure that it can be re-elected under the pair wise voting rule. In this setup, we find that the non-cooperative agreement is dominant over the cooperative agreement in terms of welfare. Later, we drop the status quo constraint from the cooperative agreement and find that (a) under symmetric benefit case (i.e. where both countries have the same level of benefit from a public good), the non-cooperative agreement is weakly dominant over the cooperative agreement in terms of welfare; and (b) under the asymmetric benefit case the complete cooperation is not possible. Finally, we show that, under certain conditions, the welfare of the Nash Bargaining Solution (NBS) is equivalent to the welfare of non-cooperative agreement with the status-quo. Furthermore, although the welfare of NBS is higher under asymmetric expected benefits, it is possible that one ruling party loses its majority votes as the majority are not satisfied with the bilateral agreement. Therefore, ex-post, it is possible that one country will renege on such a cooperative agreement.