The Design of Voluntary Agreements in Oligopolistic Markets

Rinaldo Brau () and Carlo Carraro ()

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: This paper analyses the conditions under which a group of firms is incentivised to sign a voluntary agreement (VA) to control polluting emissions even in the presence of free-riding by other firms in the industry. We consider a policy framework in which firms in a given industry decide whether or not to sign a VA proposed by an environmental regulator. We identify the features that a VA should possess in order to incentivize firms to participate in the VA and to enhance its economic and environmental effectiveness. Under very general conditions on the shape of the demand schedule, we obtain the following results. First, a VA does not belong to the equilibrium of the coalition game when benefits from voluntary emission abatement are a pure public good. Second, in the presence of partial spillovers – i.e. when signatories obtain more benefits from the VA than non-signatories – a VA belongs to the equilibrium only if a minimum participation rule is guaranteed. Third, a VA with a minimum participation rule and a minimum mandatory emission abatement may improve welfare (and even industry profits) compared to a VA in which firms are free to set their own profit maximising abatement level.

Keywords: voluntary agreement; voluntary approaches; new policy instruments; environmental regulation; coalition structures; emission standards (search for similar items in EconPapers)
JEL-codes: D21 K32 Q28 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ene, nep-env, nep-ind and nep-reg
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The design of voluntary agreements in oligopolistic markets (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:200907

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