Sunk capital and negotiated resolutions of environmental conflicts

Two nations seek a cooperative agreement to control bilateral flows of an i ndustrial pollutant. From previous noncooperative production choices, the n ations hold a certain amount of stink capital. If production requires relat ively large investments in slink capital, the nations ma), find that they c annot negotiate production quotas that improve on their noncooperative choi ces. When the nations find cooperation worthwhile, negotiated levels of pro duction will be higher than in the absence of stink capital. Furthermore, b oth nations are motivated to attempt to manipulate the terms of the agreeme nt by making strategic investments in sunk capital prior to its completion. (JEL D62, K32, Q20).