Growth Heterogeneity and International Environmental Agreements

How does growth heterogeneity affect countries’ incentives to enter an international environmental agreement (IEA)? We address this issue in a twocountry model of endogenous growth. Two countries differ in their initial capital stocks, emulating a more developed country and a less developed one. Each country’s setup takes after that of Stokey (1998) but pollution is transboundary. Absent an IEA, the two countries play a dynamic non-cooperative game by choosing consumption and emission time paths. We first consider an IEA that maximizes joint welfare of the two countries and show that such an IEA can reduce the welfare of the more developed country, if transfers are not possible. We then analyze how the timing of such an IEA affects each country’s incentive in ratifying it and show that as the gap between the two countries closes, the more developed country can become better off by entering the IEA. Lastly, we illustrate the possibility of an (immediate and “second best”) IEA that improves both countries’ welfare.