Abstract
This paper analyses voluntary agreements (VA) between public agencies and polluting industries. It is shown that voluntary agreements provide gains both for governments and for industries relative to the use of emission licenses and can thus be seen as both rational and self-enforcing. The condition for this conclusion is that the regulator has preferences over labour participation rates due to the presence of layoff costs. The gains for both parties in signing an agreement are highest when the industry is one with high productivity, low wages, and low environmental costs, while the effects on gains differ across the two negotiating parties for high output elasticities with respect to emissions and labour.
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