POLITICAL-INSTITUTIONS AND THE DESIGN OF ENVIRONMENTAL-POLICY IN A FEDERAL SYSTEM WITH ASYMMETRIC INFORMATION

Policy debates on trade and the environment frequently refer to a need for countries linked by trade to co-ordinate, or even harmonise, thei r purely domestic environmental policies. Underlying this argument is a concern that national governments will not fully internalise environ mental externalities. Conventional trade models suggest this concern i s unwarranted and harmonisation may be damaging. In this paper, I cons ider two possible bases for this concern-strategic trade and political economy considerations-and assess the implications for the design of policy and political institutions to achieve co-ordination. A model wh ich links these two factors suggests a possible rationale for harmonis ation of environmental policies, even when countries differ significan tly with respect to environmental damage costs. (C) 1998 Elsevier Scie nce B.V. All rights reserved.