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We analyse a principal-agent relationship within the context of international environmental agreements. First, the principals of the two countries decide whether to link their domestic emission permit markets to an international market and delegate, in either case, the decision on permit issuance to an agent who acts on their behalf. In the case of linking, the delegated agents decide cooperatively on the total level of emissions and the allocation of permits. In the last stage, emission permits are traded. Solving by backwards induction and employing a Nash-Bargaining Solution, we ask whether emissions are in fact lower in the cooperative outcome given the strategic considerations in the choice of the delegates. In addition, we explore whether the prospect of cooperation makes linking less probable.
