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Journal of Regulatory Economics

, Volume 39, Issue 2, pp 111–142 | Cite as

The design of voluntary agreements in oligopolistic markets

  • Rinaldo Brau
  • Carlo Carraro
Original Article

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.

Keywords

Voluntary agreement Voluntary approaches New policy instruments Environmental regulation Coalition structures Emission standards 

JEL Classification

K32 D21 Q58 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.University of Cagliari and CRENoSCagliariItaly
  2. 2.University of VeniceVeniceItaly
  3. 3.Fondazione Eni Enrico MatteiMilanItaly
  4. 4.CMCCVeniceItaly

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