The design of voluntary agreements in oligopolistic markets |
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Authors: | Rinaldo Brau Carlo Carraro |
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Institution: | 1.University of Cagliari and CRENoS,Cagliari,Italy;2.University of Venice,Venice,Italy;3.Fondazione Eni Enrico Mattei,Milan,Italy;4.CMCC,Venice,Italy |
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Abstract: | This paper analyses the conditions under which a group of firms have the incentive 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 provide firms with an incentive 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, unless an industry emission target is set by the regulator. Second, in the presence of partial
spillovers—i.e. when signatories obtain more benefits from the VA than non-signatories—a VA can belong 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 maximizing abatement level. |
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