Transboundary air pollution, environmental aid, and political uncertainty

A two-stage game is used to evaluate the effectiveness of untied aid in reducing transboundary emissions. The donor nation (North) has incomplete information regarding the political willingness of the recipient (South) to enforce emission standards. The South may be tough or weak on pollution. We provide necessary and sufficient conditions for the existence of pooling and separating equilibria. Perversely, untied Northern aid is a potential source of higher pollution, at least in the short run, because it provides an incentive for strategic, reputation-building behavior in the form of excessive Southern emissions. (C) 2001 Elsevier Science.