International Agreements, Economic Sovereignty and Exit

We develop a model in which it is uncertainty about the future domestic policy environment that both makes international cooperation attractive and induces the possibility of a nation reneging on such an international agreement. We show, in a fairly general setting that the possibility of exit reduces the optimal degree of initial cooperation. "Full" cooperation will never be optimal, and the optimal degree of cooperation will never be such as to "squeeze out" any possibility of exit.