This paper analytically compares the effectiveness of internal and external transfers in encouraging participants in international environmental agreements (IEAs). We divide countries into two homogeneous groups: developed and developing countries. Further, we assume that strong asymmetries exist in their abatement benefits and costs. Using the non-cooperative game model of coalition formation, our result shows that both types of transfers can enlarge the size of self-enforcing coalitions, and the external transfers are always preferred.
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