Relational Voluntary Environmental Agreements with Unverifiable Emissions

Cesi Berardino () and D’Amato Alessio ()
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Cesi Berardino: Department of Political Sciences, La Sapienza University of Rome, p.zza Aldo Moro, 5, Rome, Italy
D’Amato Alessio: Department of Economics and Finance, Tor Vergata University of Rome and SEEDS, Rome, Italy

The B.E. Journal of Economic Analysis & Policy, 2023, vol. 23, issue 4, 1045-1071

Abstract: Environmental regulation and pollution control may clash against the presence of unverifiable tasks, like source-specific emissions. To tackle this issue, we reshape a voluntary agreement instrument, already available in the existing literature, from a dynamic perspective by means of a relational contracting approach. We define a Relational Voluntary Environmental Agreement (RVEA) in an N firms symmetric context, and show that even if emissions are not contractible across firms, and therefore enforcement cannot be delegated to a third party, if firms are sufficiently patient, a self-enforcing RVEA induces the achievement of the environmental objective. Finally, our welfare analysis reveals a notable result: our RVEA can imply less free riding and be welfare-improving with respect to a Voluntary Environmental Agreement enforced by a third party (along the lines of McEvoy, D. M., and J. K. Stranlund. 2010. “Costly Enforcement of Voluntary Environmental Agreements.” Environmental and Resource Economics 47: 45–63).

Keywords: relational contracts; environmental policy; unverifiability; Voluntary Environmental Agreement (search for similar items in EconPapers)
JEL-codes: D62 H23 Q58 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejeap-2022-0464

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