Voluntary Environmental Agreements when Regulatory Capacity is Weak

Voluntary agreements (VAs) negotiated between environmental regulators and industry are increasingly popular. However, little is known about whether they are likely to be effective in developing and transition countries where local and federal environmental regulatory capacity is typically weak. We develop a dynamic theoretical model to examine the effect of VAs on investment in regulatory infrastructure and pollution abatement in such countries. We find that under certain conditions, VAs can improve welfare by generating more private-sector investment in pollution control and more public-sector investment in regulatory capacity than the status quo.