Relational Voluntary Environmental Agreements when Emissions Are Unverifiable

Berardino Cesi and Alessio D'Amato ()
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Berardino Cesi: University of Rome Tor Vergata, Rome, Italy

No 821, SEEDS Working Papers from SEEDS, Sustainability Environmental Economics and Dynamics Studies

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 received literature, in a dynamic perspective by means of a relational contracting approach. Setting up a Relational Voluntary Environmental Agreement (REA) helps the regulator to solve the unverifiability issue, and may provide polluting firms with the incentives to stick to environmental requirements. In an N firms symmetric context we show that even if emissions are not contractible across firms, so that enforcement cannot be delegated to a third party, if firms themselves are sufficiently patient, a self-enforcing equilibrium, under which the environmental objective is voluntarily met, exists. Finally, the policy analysis reveals that our REA may be welfare-improving with respect to a Voluntary Environmental Agreement on contractible emissions. This occurs when the enforcement cost savings under a relational agreement are larger than the additional social costs related to free riding.

Keywords: Relational Contracts; Environmental Policy; UnveriÂ…ability; Voluntary Environmental Agreement (search for similar items in EconPapers)
JEL-codes: D62 H23 Q58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-06, Revised 2021-06
New Economics Papers: this item is included in nep-cta, nep-ene, nep-env and nep-res
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http://www.sustainability-seeds.org/papers/RePec/srt/wpaper/0821.pdf First version, 2021 (application/pdf)
http://www.sustainability-seeds.org/papers/RePec/srt/wpaper/0821.pdf Revised version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:srt:wpaper:0821

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