Working Paper: NBER ID: w4849
Authors: Jonathan Eaton; Maxim Engers
Abstract: Global environmental concerns have increased the sensitivity of governments and other parties to the actions of those outside their national jurisdiction. Parties have tried to extend influence extraterritorially both by promising to reward desired behavior and by threatening to punish undesired behavior. If information were perfect, the Coase theorem would suggest that either method of seeking influence could provide an efficient outcome. If the parties in question have incomplete information about each other's costs and benefits from different actions, however, either method can be costly, both to those seeking influence and in terms of overall efficiency. We compare various methods of seeking influence. A particular issue is dissembling: taking an action to mislead the other party about the cost or benefit of that action. By creating an incentive to dissemble, attempts to influence another's behavior can have the perverse effect of actually encouraging the action that one is trying to discourage.
Keywords: International Trade; Environmental Policy; Sanctions; Rewards
JEL Codes: F18; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sender's actions (promising rewards or threatening sanctions) (C78) | target's responses (polluting or refraining from pollution) (Q52) |
| sender's choice between rewarding or threatening sanctions (D70) | target's behavior (L21) |
| lack of access to draconian sanction (P37) | treating dirty target more favorably than clean one (F18) |
| sender's belief about target's type (D83) | sender's strategy (C78) |
| clean target bluffing to appear dirty (D82) | securing a higher reward (C78) |
| absence of draconian sanction (P37) | misrepresentation of target's type (C52) |
| availability of mild and draconian sanctions (P37) | more accurate discernment of target's type (Y50) |
| interaction between sender and target over time (L14) | success of influence strategies (M54) |