The Importance of Pre-commitment in International Environmental Agreements

In the face of transboundary pollution externalities, cooperation in regulatory efforts between countries is required to move the economy towards the efficient outcome. Existing research in this field concludes that such cooperation is unlikely to occur because of the free-rider problem. This paper introduces the institution of international treaties and shows that a cooperative outcome supported by a treaty is sustainable. One effective treaty structure requires countries to reduce their pollution levels by a common percentage from the non-cooperative benchmark level, but only if all countries sign it. Under such a treaty arrangement, welfare improvements are generally significant.