Keeping Negotiations in the Dark: Environmental Agreements Under Incomplete Information

Abstract

This paper investigates the role of uncertainty as a tool to support cooperation in international environmental agreements. We consider two layers of uncertainty: one where only the follower is uninformed about the leader's environmental concern, which we refer as "unilateral uncertainty," and another where both leader and follower are uninformed about each others' concerns, denoted as "bilateral uncertainty." We show that under unilateral uncertainty treaties become successful with positive probability in the signaling game, even under parameter conditions for which no agreement is reached under complete information. Under bilateral uncertainty, a separating equilibrium emerges where the leader participates in the treaty only when its environmental concerns are high. Hence, we show that the agreement is signed for larger sets of parameter values under unilateral than bilateral uncertainty. We then evaluate the welfare properties of these equilibria, showing that further layers of uncertainty might enhance social welfare under certain conditions.

Keywords: Signaling games, Unilateral uncertainty, Bilateral uncertainty, Non-binding negotiations

JEL Classification: C72, D62, Q28