Externalities and agreements in international rivers

Abstract

The thesis investigates the unidirectional impact of an upstream country’s activities on the water quantity/quality of an international river in a downstream country, an the effect of this unidirectional externality on reaching self-enforcing water agreements.

The first part of the thesis develops a dynamic game of incomplete information to model strategic behaviour in reaching agreements on sharing the waters of the River Nile, when the actual power of downstream Egypt is unknown to upstream Ethiopia.  The main results of the analysis are that beliefs do matter, that being perceived as strong is more important that actually being strong to avoid conflict, and that more accurate information can prevent war although it cannot prevent the conflict.

The second part of the thesis considers a two-player, multi-period dynamic game with complete but imperfect information, to model the effect of asymmetric irreversibility of the actions of two countries sharing a river on the feasibility of reaching a self-enforcing environmental agreement.  The main results of the analysis are that full co-operation cannot be achieved if at least one country’s actions are irreversible, that higher levels of partial co-operation can be sustained if both countries’ actions are irreversible compared to the case where only one country’s actions are irreversible, the type of co-operation, whether gradual or immediate has only an effect if both countries’ actions are irreversible.

The final part of the thesis examines two reduced form relationships between various river pollution indicators and economic development indicators for domestic and international rivers.  The objective is to determine whether the income-environmental quality relationship is affected by the nature of the river and to determine the effect of ignoring inter-country pollution on the intra-country turning points of the Environmental Kuznets curves.  The main results indicate that national income is an important determinant for river pollution, especially for domestic rivers, that upstream effects and especially income related upstream effects, seem to play an important role in river pollution, that all pollutants peak at a lower level of income in domestic rivers than in international river, that most pollutants peak at lower level of income when upstream effects are considered.

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