Strategic Delegation and Centralized Climate Policy

In the presented paper (joint with Maria Arvaniti, ETH), we analyse a typical principal-agent relationship in the context of international environmental agreements. First, the principals delegate the authority to negotiate an agreement to an agent each, who acts on their behalf. Second, the appointed agents bargain over the total level of emissions and the allocation of permits. In the last stage, emission permits are traded. Solving by backwards induction and using the Nash-Bargaining Solution, we find that despite the strategic considerations in the choice of the delegates, global emissions are lower under cooperation in comparison to non-cooperative policies. Furthermore, for cooperation to be mutually beneficial for both principals, their countries need to be sufficiently symmetric.