This paper examines conceptually the need and potential for coalition breaking in policy reform efforts related to agriculture and the environment. The object is to consider compensation schemes enacted by means of traditional policy tools that can break existing coalitions given the powerful noncompetitive role of strong interest groups such as government bureaucracy and large trading institutions. Choice of the policy mix is considered as a cooperative bargaining problem. A generalization of Nash bargaining is used to endogenize coalition formation and size determination. This framework is then used to examine the potential for an external development agency to induce inclusion of environmental interests in dominant coalitions influencing policy formation. The results offer some potential explanations for observed production below marginal cost by environmentally damaging industries and show that the potential for gaining environmental improvements by strategic use of international aid is a complex issue. The results explain how the marginal payoff to strategic aid may be relatively constant in some countries while, in others, a small increase in strategic aid may achieve a major payoff even though past activities have been unproductive, and in others such activities can be expected to be fruitless even with a major increase in aid. The richness of the results follows from considering alternative possibilities for benefits to various interest groups in the shadow coalitiops.