We have benefited from constructive comments from anonymous referees and from participants at a conference of the German Economic Association and at workshops and seminars at the University of Bonn (ZEI), University of London (Queen Mary), University of Exeter Business School, and University of Bayreuth. We gratefully acknowledge financial support from the German Research Foundation (DFG), SPP 1142, and the German Federal Ministry of Education and Research, FKZ 01LA1139A (RECAP15).
International Environmental Agreements, Fiscal Federalism, and Constitutional Design
Article first published online: 15 AUG 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 21, Issue 4, pages 705–718, September 2013
How to Cite
Buchholz, W., Haupt, A. and Peters, W. (2013), International Environmental Agreements, Fiscal Federalism, and Constitutional Design. Review of International Economics, 21: 705–718. doi: 10.1111/roie.12065
- Issue published online: 15 AUG 2013
- Article first published online: 15 AUG 2013
- German Research Foundation (DFG). Grant Number: SPP 1142
- German Federal Ministry of Education and Research. Grant Number: FKZ 01LA1139A (RECAP15)
In this paper, we analyze how the prospect of international negotiations over trans-boundary pollution shapes intracountry transfer schemes when the governments of the countries' polluting regions are in charge of environmental policy and negotiations. Federal governments can implement compensation payments between domestic regions and matching grants prior to the international negotiations between the polluting regions. The subgame-perfect transfer schemes fail to fully internalize the environmental externality, leading to an inefficient international environmental agreement. As the international spillover increases, the intracountry compensation rates increase while the matching rates decline, distorting the incentives for the regional governments in opposing directions. We also show that decentralization of environmental decision making arises endogenously.