Voluntary Agreements as Information Sharing Devices: Competition and Welfare Effects
Climate Change and Sustainable Development
In this paper we consider Voluntary Agreements (VAs) as an information-sharing device. In a duopoly model firms compete à la Cournot and aim to reduce environmental damages because consumers have green preferences that partially internalise negative externalities. However both firms are uncertain about the real cost of pollution abatement. We suppose that this kind of uncertainty is completely eliminated if firms subscribe to a Voluntary Agreement and share information. We then represent the decision process as a two stage game where firms first choose to subscribe or not to a Voluntary Agreement and then compete in quantities. Information production and disclosure about costs eliminates production errors as both firms will be able to exactly counter-adjust their output to the output produced by their opponent. Thus profits are always maximised by subscribing to Voluntary Agreements. Concerning social welfare the picture is more complicated because there can be a trade-off between the advantage of voluntary agreements from the point of view of their impact on environmental damages and their social cost in terms of higher prices and lower quantities. Actually, output counter-adjustments are ”collusive” and they benefit consumers only to the extent that their direction is such to reduce output and then environmental damages. Thus consumer surplus can increase if the weight of output counter-adjustments is low with respect to output adjustments that are operated by both firms in the same direction. If the weight of output counter-adjustments is higher consumer surplus can increase only if the efficiency of pollution-reducing activities inside firms differs a lot between these same firms. Our results seem to support the view that the great flexibility that voluntary agreements grant to firms with respect to mandatory standards can produce advantages also from the point of view of society.