There is Trouble with the Trees: How to Avoid Trade-Induced Deforestation?

Trade and environment are intertwined subjects. The literature on the impact of trade opening on environmental outcomes are vast. Lacking however is the literature in how trade can be used politically to induce better environmental outcomes. To model this properly, we develop a game theoretic model in which two countries engage in trade and choose their respective levels of deforestation and trade tariffs. We consider the scenarios of market and central equilibria and derive some useful insights into their relationship of these two variables. As an extension, we also propose different model specifications and develop a numeric generalization of the model, which allows testing our models prediction for several countries. As a result, we find that there is an incentive for free-riding from the countries less concerned with deforestation on the countries that suffer the most disutility of its own deforestation.