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Public intervention in a ‘take-it-or-leave-it’ transaction situation under varying interests of the intervening body

Published online by Cambridge University Press:  17 May 2006

MARGRETHE AANESEN
MARGRETHE AANESEN
Affiliation:
NORUT Social Science Research
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Abstract

Though there are economically based arguments for public intervention in negotiations between private agents, such intervention will often take place as a consequence of political interests. In this paper we discuss how varying political interests of an intervening body affect its intervention mechanism. We derive a unique Bayesian–Nash equilibrium for a two-step, three-player game in which the optimal intervention mechanism (subsidies) and the optimal size of the traded good are decided.

The paper has been motivated by the negotiations between a Russian processing plant, causing transboundary, polluting emissions, and Nordic companies offering technology which will reduce the emissions significantly. Nordic governments have intervened in the negotiations and offered subsidies, which is subtracted from the seller's price if trade takes place. Combining the theoretical results and empirical facts we conclude that the Norwegian government seems to have had stronger political interests in this case than did the Finnish government.

Type
Research Article
Information
Environment and Development Economics , Volume 11 , Issue 3 , June 2006 , pp. 393 - 409
Copyright
© 2006 Cambridge University Press

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Footnotes

I would like to thank Prof. Derek J. Clark for very useful comments and suggestions during the work with the paper. I would also like to thank Prof. Manfred J. Holler, Claire Armstrong and Heide Coenen for useful comments to earlier drafts of the paper. All errors in the paper are the author's responsibility.