Carrots, sticks, and international externalities

International Review of Law and Economics

Volumn 17, Issue 3, 1997, Pages 309-324

  Chang, Howard F ^a  

^a NONE

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EID: 0031232363     PISSN: 01448188     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0144-8188(97)00019-7     Document Type: Article

References (62)

1. 1 For critiques of environmental trade measures, see Jagdish Bhagwati, "Trade and the Environment: The False Conflict?" in Trade and the Environment: Law, Economics, and Policy, eds. Durwood Zaelke et al. (Washington, DC: Island Press, 1993) p. 159, and Arvind Subramanian, "Trade Measures for Environment: A Nearly Empty Box?," World Economy 135 (Jan. 1992). For defenses of these measures, see Howard F. Chang, "An Economic Analysis of Trade Measures to Protect the Global Environment," 83 Georgetown Law Journal 2131 (1995), and Robert Howse and Michael J. Trebilcock, "The Fair Trade-Free Trade Debate: Trade, Labor, and the Environment," 16 International Review of Law and Economics 61 (1996).
2. 1 For critiques of environmental trade measures, see Jagdish Bhagwati, "Trade and the Environment: The False Conflict?" in Trade and the Environment: Law, Economics, and Policy, eds. Durwood Zaelke et al. (Washington, DC: Island Press, 1993) p. 159, and Arvind Subramanian, "Trade Measures for Environment: A Nearly Empty Box?," World Economy 135 (Jan. 1992). For defenses of these measures, see Howard F. Chang, "An Economic Analysis of Trade Measures to Protect the Global Environment," 83 Georgetown Law Journal 2131 (1995), and Robert Howse and Michael J. Trebilcock, "The Fair Trade-Free Trade Debate: Trade, Labor, and the Environment," 16 International Review of Law and Economics 61 (1996).
3. 1 For critiques of environmental trade measures, see Jagdish Bhagwati, "Trade and the Environment: The False Conflict?" in Trade and the Environment: Law, Economics, and Policy, eds. Durwood Zaelke et al. (Washington, DC: Island Press, 1993) p. 159, and Arvind Subramanian, "Trade Measures for Environment: A Nearly Empty Box?," World Economy 135 (Jan. 1992). For defenses of these measures, see Howard F. Chang, "An Economic Analysis of Trade Measures to Protect the Global Environment," 83 Georgetown Law Journal 2131 (1995), and Robert Howse and Michael J. Trebilcock, "The Fair Trade-Free Trade Debate: Trade, Labor, and the Environment," 16 International Review of Law and Economics 61 (1996).
4. 1 For critiques of environmental trade measures, see Jagdish Bhagwati, "Trade and the Environment: The False Conflict?" in Trade and the Environment: Law, Economics, and Policy, eds. Durwood Zaelke et al. (Washington, DC: Island Press, 1993) p. 159, and Arvind Subramanian, "Trade Measures for Environment: A Nearly Empty Box?," World Economy 135 (Jan. 1992). For defenses of these measures, see Howard F. Chang, "An Economic Analysis of Trade Measures to Protect the Global Environment," 83 Georgetown Law Journal 2131 (1995), and Robert Howse and Michael J. Trebilcock, "The Fair Trade-Free Trade Debate: Trade, Labor, and the Environment," 16 International Review of Law and Economics 61 (1996).
5. 2 General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. pt. 5, 55 U.N.T.S. 187 [hereinafter GATT].
6. 3 Garrett Hardin, "The Tragedy of the Commons," 162 Science 1243 (1968); see Harold Demsetz, "Toward a Theory of Property Rights," 57 American Economic Review Papers and Proceedings 347 (1967).
7. 3 Garrett Hardin, "The Tragedy of the Commons," 162 Science 1243 (1968); see Harold Demsetz, "Toward a Theory of Property Rights," 57 American Economic Review Papers and Proceedings 347 (1967).
8. 4 See Report of the Panel, United States - Restrictions on Imports of Tuna, GATT Doc. DS29/R (submitted to the parties May 20, 1994), 33 I.L.M. 839 [hereinafter 1994 Decision]; Report of the Panel, United States - Restrictions on Imports of Tuna, GATT Doc. DS21/R (submitted to the parties August 16, 1991) in Basic Instruments and Selected Documents, (Geneva: GATT, 39th Supp. 1993) [hereinafter 1991 Decision].
9. 4 See Report of the Panel, United States - Restrictions on Imports of Tuna, GATT Doc. DS29/R (submitted to the parties May 20, 1994), 33 I.L.M. 839 [hereinafter 1994 Decision]; Report of the Panel, United States - Restrictions on Imports of Tuna, GATT Doc. DS21/R (submitted to the parties August 16, 1991) in Basic Instruments and Selected Documents, (Geneva: GATT, 39th Supp. 1993) [hereinafter 1991 Decision].
10. 5 16 U.S.C. §§ 1361-1421h (1994).
11. 6 A wide variety of trade measures have been used or proposed to protect environmental interests. For a comprehensive survey of environmental trade measures, see Steve Charnovitz, "A Taxonomy of Environmental Trade Measures," 6 Georgetown International Environmental Law Review 1 (1993).
12. 7 The next round of trade negotiations under the GATT will take up the issue of the environment. See "Members Agree on Inclusion in GATT Talks of Environment," 11 International Trade Reporter (BNA) 98 (Jan. 19, 1994). The United States has agreed with other countries to set up a Committee on Trade and the Environment to address these issues in the World Trade Organization. See "GATT Trade-Environment Panel's Work Will Begin Soon After Mid-April Signing," 11 International Trade Reporter (BNA) 498 (Mar. 30, 1994).
13. 7 The next round of trade negotiations under the GATT will take up the issue of the environment. See "Members Agree on Inclusion in GATT Talks of Environment," 11 International Trade Reporter (BNA) 98 (Jan. 19, 1994). The United States has agreed with other countries to set up a Committee on Trade and the Environment to address these issues in the World Trade Organization. See "GATT Trade-Environment Panel's Work Will Begin Soon After Mid-April Signing," 11 International Trade Reporter (BNA) 498 (Mar. 30, 1994).
14. 8 See, e.g., David Phillips, "Dolphins and GATT," in The Case Against Free Trade: GATT, NAFTA, and the Globalization of Corporate Power (San Francisco, CA: Earth Island Press, 1993) p. 133. In response to the GATT panel's decision, environmental groups called for a grassroots campaign to block efforts to strengthen the GATT through the Uruguay Round of trade negotiations. See Daniel C. Esty, Greening the GATT: Trade, Environment, and the Future (Washington, DC: Institute for International Economics, 1994) pp. 34-35; Hilary F. French, "The GATT: Menace or Ally?" World Watch 12 (Sept.-Oct. 1993).
15. 8 See, e.g., David Phillips, "Dolphins and GATT," in The Case Against Free Trade: GATT, NAFTA, and the Globalization of Corporate Power (San Francisco, CA: Earth Island Press, 1993) p. 133. In response to the GATT panel's decision, environmental groups called for a grassroots campaign to block efforts to strengthen the GATT through the Uruguay Round of trade negotiations. See Daniel C. Esty, Greening the GATT: Trade, Environment, and the Future (Washington, DC: Institute for International Economics, 1994) pp. 34-35; Hilary F. French, "The GATT: Menace or Ally?" World Watch 12 (Sept.-Oct. 1993).
16. 8 See, e.g., David Phillips, "Dolphins and GATT," in The Case Against Free Trade: GATT, NAFTA, and the Globalization of Corporate Power (San Francisco, CA: Earth Island Press, 1993) p. 133. In response to the GATT panel's decision, environmental groups called for a grassroots campaign to block efforts to strengthen the GATT through the Uruguay Round of trade negotiations. See Daniel C. Esty, Greening the GATT: Trade, Environment, and the Future (Washington, DC: Institute for International Economics, 1994) pp. 34-35; Hilary F. French, "The GATT: Menace or Ally?" World Watch 12 (Sept.-Oct. 1993).
17. 9 See, e.g., Matthew Hunter Hurlock, "The GATT, U.S. Law and the Environment: A Proposal to Amend the GATT in Light of the Tuna/Dolphin Decision," 92 Columbia Law Review 2098 (1992); Eliza Patterson, "GATT and the Environment - Rules Changes to Minimize Adverse Trade and Environmental Effects," Journal of World Trade 99 (June 1992).
18. 9 See, e.g., Matthew Hunter Hurlock, "The GATT, U.S. Law and the Environment: A Proposal to Amend the GATT in Light of the Tuna/Dolphin Decision," 92 Columbia Law Review 2098 (1992); Eliza Patterson, "GATT and the Environment - Rules Changes to Minimize Adverse Trade and Environmental Effects," Journal of World Trade 99 (June 1992).
19. 10 See GATT Secretariat, "Trade and the Environment," in 1 International Trade 90-91, GATT (1992) p. 19.
20. 11 Environmentalists warned that the Uruguay Round accord would strengthen a trade regime that threatens our environmental laws. See "Why Is Mickey Kantor Deceiving You About GATT?," (Aug. 1, 1994) New York Times, at A15 (advertisement by Public Citizen, Greenpeace, and Citizen's Clearinghouse for Hazardous Wastes). U.S. Trade Representative Mickey Kantor quickly announced that the United States would seek reconsideration of the 1994 panel report by the same panel or a full substantive review by the GATT Council. See "Kantor Says United States Will Ask for Full Review in Tuna-Dolphin Ruling," 11 International Trade Reporter (BNA) 814 (May 25, 1994).
21. 11 Environmentalists warned that the Uruguay Round accord would strengthen a trade regime that threatens our environmental laws. See "Why Is Mickey Kantor Deceiving You About GATT?," (Aug. 1, 1994) New York Times, at A15 (advertisement by Public Citizen, Greenpeace, and Citizen's Clearinghouse for Hazardous Wastes). U.S. Trade Representative Mickey Kantor quickly announced that the United States would seek reconsideration of the 1994 panel report by the same panel or a full substantive review by the GATT Council. See "Kantor Says United States Will Ask for Full Review in Tuna-Dolphin Ruling," 11 International Trade Reporter (BNA) 814 (May 25, 1994).
22. 12 See Agreement Establishing the World Trade Organization, April 15, 1994, 33 I.L.M. 1144.
23. 13 See Understanding on Rules and Procedures Governing the Settlement of Disputes, April 15, 1994, art. 16, para. 4, art. 17, para. 14, 33 I.L.M. 1226, 1235, 1237. Under prior GATT practice, countries like the United States could block GATT Council adoption of panel decisions ruling against them.
24. 14 See ibid. art. 22, paras. 6-7, 33 I.L.M., pp. 1240-1241.
25. 15 For example, the United States has banned shrimp imports from countries whose fishing boats do not feature devices to prevent the accidental drowning of sea turtles in shrimp trawls. Thailand, India, Malaysia, and Pakistan have brought a complaint before the WTO claiming that this ban violates the GATT. See "Four Asian Nations Ask United States for WTO Consultations on Shrimp Ban," 13 International Trade Reporter (BNA) 1593 (Oct. 16 1996). On behalf of the Association of Southeast Asian Nations, the Philippines has also complained about the ban, comparing this ban with the U.S. ban on tuna imports that was deemed to violate the GATT. See "U.S. Ruling on Possible Embargo of Some Shrimp Is Attacked in WTO," 13 International Trade Reporter (BNA) 475 (Mar. 20, 1996). The European Union (EU) has triggered a similar dispute over its plans to ban imports of fur from animals caught with leghold traps unless the EU, Canada, Russia, and the United States can reach an agreement on an international standard for humane traps. See "EU Ministers Vote for Trade Ban on Fur from Leghold Traps If No Pact in 1996," 13 International Trade Reporter (BNA) 390 (Mar, 6,1996). With the support of the United States, Canada threatened to challenge the import ban before the WTO. See "U.S. Will Back Canada in Bringing EU to WTO over Fur Import Ban, Sources Say," 12 International Trade Reporter (BNA) 1492 (Sept. 6, 1995). Although the EU appears to have reached a satisfactory agreement with Canada and Russia, it has yet to reach an agreement with the United States. See "U.S., EU Fail to Agree on Leg-Hold Traps; EU Ministers Move on Canada, Russia Pacts," 14 International Trade Reporter (BNA) 1000 (June 4, 1997).
26. 15 For example, the United States has banned shrimp imports from countries whose fishing boats do not feature devices to prevent the accidental drowning of sea turtles in shrimp trawls. Thailand, India, Malaysia, and Pakistan have brought a complaint before the WTO claiming that this ban violates the GATT. See "Four Asian Nations Ask United States for WTO Consultations on Shrimp Ban," 13 International Trade Reporter (BNA) 1593 (Oct. 16 1996). On behalf of the Association of Southeast Asian Nations, the Philippines has also complained about the ban, comparing this ban with the U.S. ban on tuna imports that was deemed to violate the GATT. See "U.S. Ruling on Possible Embargo of Some Shrimp Is Attacked in WTO," 13 International Trade Reporter (BNA) 475 (Mar. 20, 1996). The European Union (EU) has triggered a similar dispute over its plans to ban imports of fur from animals caught with leghold traps unless the EU, Canada, Russia, and the United States can reach an agreement on an international standard for humane traps. See "EU Ministers Vote for Trade Ban on Fur from Leghold Traps If No Pact in 1996," 13 International Trade Reporter (BNA) 390 (Mar, 6,1996). With the support of the United States, Canada threatened to challenge the import ban before the WTO. See "U.S. Will Back Canada in Bringing EU to WTO over Fur Import Ban, Sources Say," 12 International Trade Reporter (BNA) 1492 (Sept. 6, 1995). Although the EU appears to have reached a satisfactory agreement with Canada and Russia, it has yet to reach an agreement with the United States. See "U.S., EU Fail to Agree on Leg-Hold Traps; EU Ministers Move on Canada, Russia Pacts," 14 International Trade Reporter (BNA) 1000 (June 4, 1997).
27. 15 For example, the United States has banned shrimp imports from countries whose fishing boats do not feature devices to prevent the accidental drowning of sea turtles in shrimp trawls. Thailand, India, Malaysia, and Pakistan have brought a complaint before the WTO claiming that this ban violates the GATT. See "Four Asian Nations Ask United States for WTO Consultations on Shrimp Ban," 13 International Trade Reporter (BNA) 1593 (Oct. 16 1996). On behalf of the Association of Southeast Asian Nations, the Philippines has also complained about the ban, comparing this ban with the U.S. ban on tuna imports that was deemed to violate the GATT. See "U.S. Ruling on Possible Embargo of Some Shrimp Is Attacked in WTO," 13 International Trade Reporter (BNA) 475 (Mar. 20, 1996). The European Union (EU) has triggered a similar dispute over its plans to ban imports of fur from animals caught with leghold traps unless the EU, Canada, Russia, and the United States can reach an agreement on an international standard for humane traps. See "EU Ministers Vote for Trade Ban on Fur from Leghold Traps If No Pact in 1996," 13 International Trade Reporter (BNA) 390 (Mar, 6,1996). With the support of the United States, Canada threatened to challenge the import ban before the WTO. See "U.S. Will Back Canada in Bringing EU to WTO over Fur Import Ban, Sources Say," 12 International Trade Reporter (BNA) 1492 (Sept. 6, 1995). Although the EU appears to have reached a satisfactory agreement with Canada and Russia, it has yet to reach an agreement with the United States. See "U.S., EU Fail to Agree on Leg-Hold Traps; EU Ministers Move on Canada, Russia Pacts," 14 International Trade Reporter (BNA) 1000 (June 4, 1997).
28. 15 For example, the United States has banned shrimp imports from countries whose fishing boats do not feature devices to prevent the accidental drowning of sea turtles in shrimp trawls. Thailand, India, Malaysia, and Pakistan have brought a complaint before the WTO claiming that this ban violates the GATT. See "Four Asian Nations Ask United States for WTO Consultations on Shrimp Ban," 13 International Trade Reporter (BNA) 1593 (Oct. 16 1996). On behalf of the Association of Southeast Asian Nations, the Philippines has also complained about the ban, comparing this ban with the U.S. ban on tuna imports that was deemed to violate the GATT. See "U.S. Ruling on Possible Embargo of Some Shrimp Is Attacked in WTO," 13 International Trade Reporter (BNA) 475 (Mar. 20, 1996). The European Union (EU) has triggered a similar dispute over its plans to ban imports of fur from animals caught with leghold traps unless the EU, Canada, Russia, and the United States can reach an agreement on an international standard for humane traps. See "EU Ministers Vote for Trade Ban on Fur from Leghold Traps If No Pact in 1996," 13 International Trade Reporter (BNA) 390 (Mar, 6,1996). With the support of the United States, Canada threatened to challenge the import ban before the WTO. See "U.S. Will Back Canada in Bringing EU to WTO over Fur Import Ban, Sources Say," 12 International Trade Reporter (BNA) 1492 (Sept. 6, 1995). Although the EU appears to have reached a satisfactory agreement with Canada and Russia, it has yet to reach an agreement with the United States. See "U.S., EU Fail to Agree on Leg-Hold Traps; EU Ministers Move on Canada, Russia Pacts," 14 International Trade Reporter (BNA) 1000 (June 4, 1997).
29. 15 For example, the United States has banned shrimp imports from countries whose fishing boats do not feature devices to prevent the accidental drowning of sea turtles in shrimp trawls. Thailand, India, Malaysia, and Pakistan have brought a complaint before the WTO claiming that this ban violates the GATT. See "Four Asian Nations Ask United States for WTO Consultations on Shrimp Ban," 13 International Trade Reporter (BNA) 1593 (Oct. 16 1996). On behalf of the Association of Southeast Asian Nations, the Philippines has also complained about the ban, comparing this ban with the U.S. ban on tuna imports that was deemed to violate the GATT. See "U.S. Ruling on Possible Embargo of Some Shrimp Is Attacked in WTO," 13 International Trade Reporter (BNA) 475 (Mar. 20, 1996). The European Union (EU) has triggered a similar dispute over its plans to ban imports of fur from animals caught with leghold traps unless the EU, Canada, Russia, and the United States can reach an agreement on an international standard for humane traps. See "EU Ministers Vote for Trade Ban on Fur from Leghold Traps If No Pact in 1996," 13 International Trade Reporter (BNA) 390 (Mar, 6,1996). With the support of the United States, Canada threatened to challenge the import ban before the WTO. See "U.S. Will Back Canada in Bringing EU to WTO over Fur Import Ban, Sources Say," 12 International Trade Reporter (BNA) 1492 (Sept. 6, 1995). Although the EU appears to have reached a satisfactory agreement with Canada and Russia, it has yet to reach an agreement with the United States. See "U.S., EU Fail to Agree on Leg-Hold Traps; EU Ministers Move on Canada, Russia Pacts," 14 International Trade Reporter (BNA) 1000 (June 4, 1997).
30. 16 1991 Decision, supra note 4, para. 5.28, p. 199.
31. 17 See 1994 Decision, supra note 4, paras. 5.27, .39, 33 I.L.M., pp. 894, 898.
32. 18 GATT Secretariat, supra note 10, p. 36 (footnote omitted).
33. 19 Trade restrictions, however, need not be imposed to be effective. The mere threat of restrictions can induce the target country to cooperate. If restrictions are not imposed or are not in place for very long, then the total economic costs of trade distortions due to the restrictions would be correspondingly small.
34. 20 "Carrots" can also take less efficient forms. We can induce foreign governments to cooperate, for example, by allowing them to raise politically popular trade barriers.
35. 21 See R.H. Coase, "The Problem of Social Cost," 3 Journal of Law and Economics 1 (1960).
36. 22 See, e.g., Peter C. Cramton, "Bargaining with Incomplete Information: An Infinite-Horizon Model with Two-Sided Uncertainty," 51 Review of Economic Studies 579 (1984); Drew Fudenberg and Jean Tirole, "Sequential Bargaining with Incomplete Information," 50 Review of Economic Studies 221 (1983); Sanford J. Grossman and Motty Perry, "Sequential Bargaining under Asymmetric Information," 39 Journal of Economic Theory 120 (1986).
37. 22 See, e.g., Peter C. Cramton, "Bargaining with Incomplete Information: An Infinite-Horizon Model with Two-Sided Uncertainty," 51 Review of Economic Studies 579 (1984); Drew Fudenberg and Jean Tirole, "Sequential Bargaining with Incomplete Information," 50 Review of Economic Studies 221 (1983); Sanford J. Grossman and Motty Perry, "Sequential Bargaining under Asymmetric Information," 39 Journal of Economic Theory 120 (1986).
38. 22 See, e.g., Peter C. Cramton, "Bargaining with Incomplete Information: An Infinite-Horizon Model with Two-Sided Uncertainty," 51 Review of Economic Studies 579 (1984); Drew Fudenberg and Jean Tirole, "Sequential Bargaining with Incomplete Information," 50 Review of Economic Studies 221 (1983); Sanford J. Grossman and Motty Perry, "Sequential Bargaining under Asymmetric Information," 39 Journal of Economic Theory 120 (1986).
39. 23 Richard H. Snape, "The Environment, International Trade and Competitiveness," in The Greening of World Trade Issues, ed. Kym Anderson and Richard Blackhurst (Ann Arbor, MI: University of Michigan Press, 1992), warns of the "incentives which such compensation may provide for the adoption of production processes which are not the most pollution-efficient from a world perspective." Ibid., p. 85. Snape, however, does not elaborate, nor does he analyze precisely how such compensation creates such incentives.
40. 23 Richard H. Snape, "The Environment, International Trade and Competitiveness," in The Greening of World Trade Issues, ed. Kym Anderson and Richard Blackhurst (Ann Arbor, MI: University of Michigan Press, 1992), warns of the "incentives which such compensation may provide for the adoption of production processes which are not the most pollution-efficient from a world perspective." Ibid., p. 85. Snape, however, does not elaborate, nor does he analyze precisely how such compensation creates such incentives.
41. 24 See William J. Baumol and Wallace E. Oates, The Theory of Environmental Policy, 2nd edition (Cambridge: Cambridge University Press, 1988) pp. 211-228.
42. 25 To avoid this problem, we could go so far as to pay "carrots" to all countries for pollution abatement. Because the number of countries in the world is finite, so would be the cost of this solution. This solution, however, is likely to prove so costly as to be vulnerable to free-rider problems among countries asked to provide these "carrots."
43. 26 See Jonathan Eaton and Maxim Engers, "Sanctions," 100 Journal of Political Economy 899 (1992). Eaton and Engers model the use of sanctions, including trade sanctions, as the action that is costly to both parties but can extract a concession from the "target" of the sanctions. The same model, however, can describe costly actions by one country that harm an environmental interest valued by the other country. The first country can undertake this action to wrest concessions from the target country.
44. 27 After developing this model, I learned about an independent effort to develop a formal model of this type of bargaining by Jonathan Eaton and Maxim Engers, "Threats and Promises," National Bureau of Economic Research Working Paper No. 4849 (September 1994). Although Eaton and Engers use a different model, they also find that a system of rewards can have the perverse effect of encouraging pollution because the polluting country has the incentive to mislead others about its costs and benefits from polluting. In their model, there is only one possible level of pollution greater than zero, and a polluting country "bluffs" by choosing to pollute despite an offer of a reward in the first period, so as to receive a better offer in the second period. See ibid., pp. 8-9, 13-16. In my model, there is a continuum of possible levels of pollution, and a polluting country signals its "type" through the level of pollution that it chooses before the offer of a "carrot." This framework reveals perverse effects, not only in a "bluffing" equilibrium like that described by Eaton and Engers, in which different types pool, but also in a separating equilibrium.
45. 27 After developing this model, I learned about an independent effort to develop a formal model of this type of bargaining by Jonathan Eaton and Maxim Engers, "Threats and Promises," National Bureau of Economic Research Working Paper No. 4849 (September 1994). Although Eaton and Engers use a different model, they also find that a system of rewards can have the perverse effect of encouraging pollution because the polluting country has the incentive to mislead others about its costs and benefits from polluting. In their model, there is only one possible level of pollution greater than zero, and a polluting country "bluffs" by choosing to pollute despite an offer of a reward in the first period, so as to receive a better offer in the second period. See ibid., pp. 8-9, 13-16. In my model, there is a continuum of possible levels of pollution, and a polluting country signals its "type" through the level of pollution that it chooses before the offer of a "carrot." This framework reveals perverse effects, not only in a "bluffing" equilibrium like that described by Eaton and Engers, in which different types pool, but also in a separating equilibrium.
46. 28 See, e.g., A. Michael Spence, Market Signaling (Cambridge, MA: Harvard University Press, 1974) p. 15; Michael Spence, "Job Market Signaling," 87 Quarterly Journal of Economics 355, 358-359 (1973).
47. 28 See, e.g., A. Michael Spence, Market Signaling (Cambridge, MA: Harvard University Press, 1974) p. 15; Michael Spence, "Job Market Signaling," 87 Quarterly Journal of Economics 355, 358-359 (1973).
48. 29 For a particularly accessible definition of this concept, see Eric Rasmusen, Games and Information: An Introduction to Game Theory (Cambridge, MA: Blackwell Publishers, 1989) p. 110.
49. L) in Period 2 than H could otherwise obtain.
50. L.
51. 32 See Eaton and Engers, supra note 27, pp. 8-9, 13-16.
52. 33 Greater penalties may not follow from this signal if these greater penalties are also too costly for the country using "sticks." If this signal leads the country threatening sanctions to drop its threat, then the use of "sticks" can also create a perverse incentive to pollute. Thus, as Eaton and Engers, ibid., pp. 17-18, 20-22, show in a formal model, if only "mild" sanctions are available, so that some types of polluting countries cannot be deterred, then threats can create this perverse incentive. This insight underscores the importance of preserving access to sanctions that are sufficient to deter the target of those sanctions. Historical evidence suggests that trade measures have usually been sufficient to modify policies causing environmental harms. See Steve Charnovitz, "Encouraging Environmental Cooperation Through the Pelly Amendment," 3 Journal of Environment and Development 3 (1994). Thus, these considerations on balance militate in favor of expanding the set of "sticks" available, not in favor of excluding trade measures from this set.
53. 33 Greater penalties may not follow from this signal if these greater penalties are also too costly for the country using "sticks." If this signal leads the country threatening sanctions to drop its threat, then the use of "sticks" can also create a perverse incentive to pollute. Thus, as Eaton and Engers, ibid., pp. 17-18, 20-22, show in a formal model, if only "mild" sanctions are available, so that some types of polluting countries cannot be deterred, then threats can create this perverse incentive. This insight underscores the importance of preserving access to sanctions that are sufficient to deter the target of those sanctions. Historical evidence suggests that trade measures have usually been sufficient to modify policies causing environmental harms. See Steve Charnovitz, "Encouraging Environmental Cooperation Through the Pelly Amendment," 3 Journal of Environment and Development 3 (1994). Thus, these considerations on balance militate in favor of expanding the set of "sticks" available, not in favor of excluding trade measures from this set.
54. 34 Faced with draconian "sticks," a polluting country may offer to pay a victim country for the right to pollute. In this case, the polluting country will want to offer a "carrot" sufficient to induce the victim country to drop its demand for abatement, but would also like to offer as small a "carrot" as possible. This possibility introduces some incentive for the polluting country to understate its interest in pollution, so as to reduce the "carrot" demanded by the victim country. The existence of countervailing incentives can promote more truthful revelation of actual preferences. See Ian Ayres and Eric Talley, "Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade," 104 Yale Law Journal 1027 (1995); Jason Scott Johnston, "Bargaining Under Rules Versus Standards," 11 Journal of Law, Economics, and Organization 256 (1995).
55. 34 Faced with draconian "sticks," a polluting country may offer to pay a victim country for the right to pollute. In this case, the polluting country will want to offer a "carrot" sufficient to induce the victim country to drop its demand for abatement, but would also like to offer as small a "carrot" as possible. This possibility introduces some incentive for the polluting country to understate its interest in pollution, so as to reduce the "carrot" demanded by the victim country. The existence of countervailing incentives can promote more truthful revelation of actual preferences. See Ian Ayres and Eric Talley, "Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade," 104 Yale Law Journal 1027 (1995); Jason Scott Johnston, "Bargaining Under Rules Versus Standards," 11 Journal of Law, Economics, and Organization 256 (1995).
56. 35 Subramanian, supra note 1, p. 148.
57. 36 In the domestic context, redistribution through progressive income taxes is less costly than redistribution through inefficient legal rules. See Louis Kaplow and Steven Shavell, "Why the Legal System is Less Efficient than the Income Tax in Redistributing Income," 23 Journal of Legal Studies 667, 669 (1994) ("[E]ven though the income lax distorts work incentives, any regime with an inefficient legal rule can be replaced by a regime with an efficient legal rule and a modified income tax system designed so that every person is made better off"); Steven Shavell, "A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?," 71 American Economic Review Papers and Proceedings 414 (1981). Similarly, in the context of international legal rules, alternatives to the "carrots-only" regime leave available many superior instruments for improving the global distribution of wealth.
58. 36 In the domestic context, redistribution through progressive income taxes is less costly than redistribution through inefficient legal rules. See Louis Kaplow and Steven Shavell, "Why the Legal System is Less Efficient than the Income Tax in Redistributing Income," 23 Journal of Legal Studies 667, 669 (1994) ("[E]ven though the income lax distorts work incentives, any regime with an inefficient legal rule can be replaced by a regime with an efficient legal rule and a modified income tax system designed so that every person is made better off"); Steven Shavell, "A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?," 71 American Economic Review Papers and Proceedings 414 (1981). Similarly, in the context of international legal rules, alternatives to the "carrots-only" regime leave available many superior instruments for improving the global distribution of wealth.
59. 37 See Steve Charnovitz, "GATT and the Environment: Examining the Issues," 4 International Environmental Affairs 203, 207 (1992).
60. 38 GATT, supra note 2, art. XX, 61 Stat. pt. 5, pp. A60-61, 55 U.N.T.S., p. 262.
61. 39 See Chang, supra note 1, pp. 2172-2207. For example, I suggest that using this proviso, we should presume that a trade measure directed at purely domestic environmental problems in other countries is an illegal "disguised restriction on international trade." See ibid., pp. 2190-2199. I urge the use of this proviso rather than a more sweeping prohibition on the use of environmental trade measures.
62. 39 See Chang, supra note 1, pp. 2172-2207. For example, I suggest that using this proviso, we should presume that a trade measure directed at purely domestic environmental problems in other countries is an illegal "disguised restriction on international trade." See ibid., pp. 2190-2199. I urge the use of this proviso rather than a more sweeping prohibition on the use of environmental trade measures.