International Environmental Cooperation with Imperfect Monitoring

Abstract

Many prominent environmental problems are plagued by uncertainty in the underlying biological and physical processes. Noise in the environmental process makes the link between current actions and future environmental conditions indi- rect. Where international policy coordination is called for, adherence to an agree- ment cannot be monitored unambiguously. This paper studies how to construct a self-enforcing international environmental agreement in the case of a stock pollu- tant with stochastic stock dynamics. The strategy profile proposed involves harsh punishments after a suspected deviation, which are followed by forgiveness. The model of environmental cooperation is illustrated with an application to a linear-quadratic problem with uniformly distributed additive shocks.