1 Global Externalities Sovereign States

Trans-national externalities are increasingly important in the globalized economy, being related to knowledge, information, migrations, pollution, crime and similar flows. Their importance and close link to economic development may affect growth and welfare at a macroeconomic level: hence the need for global policies to correct their undesired effects. In the present institutional setting with no supranational governing bodies global externalities cannot be corrected by global institutions,which do not exist, but need to be corrected by voluntary agreements among sovereign States. This situation gives rise to several difficulties and sub-optimal outcomes. This paper reviews some recent advances in this area, with special reference to coalition formation theory. In particular it discusses mechanisms and strategies aimed at offsetting the incentives to free-ride and/or exclude countries for international agreements, such as transfers, issue linkages, and treatise design. The main results show that, in the presence of global externalities, partial coalitions and multiple agreements tend to prevail among subsets of countries, and that agreements among all players are unlikely to exist. The design of the agreements, however, can be crucial in determining the number of signatory countries and in promoting the creation of global institutions. * Domenico Siniscalco is Profesor of Economics in the University of Torino, and Director of Fondazione ENI Enrico Mattei, Milano. The final version of the paper benefitted from many