Sharing the burden of negative externalities: A tale of gridlock and accountability elusion

Abstract

We study a game in which players negotiate the allocation of costs resulting from a negative externality, such as pollution-induced economic costs. Our goal is to explore the feasibility of preventing externalities through ex-post negotiations to share the associated burden. We demonstrate that the unanimity rule results in complete pollution due to the veto power of players, allowing them to avoid paying more than their proportional share. Conversely, under the majority rule, multiple equilibria emerge. Pollution can be avoided if players are expected to form a coalition to penalize the largest polluter, thus establishing a credible threat of liability. However, experimental findings indicate the inefficacy of both rules in reducing pollution. Although a significant proportion of high polluters are held accountable, pollution persists due to instances where high polluters use their agenda-setting power to avoid paying. Our study underscores the muted influence of equity considerations in obtaining efficient outcomes when bargaining over costs, which has important implications for ongoing climate change loss and damage negotiations.