ENVIRONMENTAL CONSCIOUSNESS AND MORAL HAZARD IN INTERNATIONAL AGREEMENTS TO PROTECT THE ENVIRONMENT

A group of countries that can potentially commit to cooperation to pro tect the environment are identified as environmentally conscious count ries. Conditions are examined under which they can provide self-financ ing side payments too a second group of less environmentally conscious countries, so that the two groups form a global or partial stable coa lition that agrees to reduce emissions. A mechanism that detects cheat ing is also developed in order to induce the desired emissions even wh en the emissions level of an individual country cannot be observed by the rest of the participating countries.