Game Theory and International Environmental Cooperation

Game Theory and International Environmental Cooperation

New Horizons in Environmental Economics series

Michael Finus

The book investigates various strategies to provide countries with an incentive to accede, agree and comply to an international environmental agreement (IEA). Finus shows that by integrating real world restrictions into a model, game theory is a powerful tool for explaining the divergence between ‘first-best’ policy recommendations and ‘second-best’ designs of actual IEAs. For instance he explains why (inefficient) uniform emission reduction quotas have played such a prominent role in past IEAs despite economists’ recommendations for the use of (efficient) market-based instruments as for example emission targets and permits. Moreover, it is stated, that a single, global IEA on climate is not necessarily the best strategy and small coalitions may enjoy a higher stability and may achieve more.

Chapter 3: Static Games with Discrete Strategy Space

Michael Finus

Subjects: economics and finance, environmental economics, game theory, environment, environmental economics

Extract

INTRODUCTION 3.1 The aim of this chapter is threefold: 1. To analyze the effect of the cost–benefit structure on the outcome of a game. Here we shall deal with the prisoners’ dilemma (Section 3.2), the chicken game (Section 3.3), the assurance game and the no-conflict game (Section 3.4) in the two-country context. An extension to cover the general case of N countries is provided in Section 3.5. To introduce some basic game theoretical concepts such as an equilibrium in dominant strategies, a Nash equilibrium in pure and uncorrelated and correlated mixed strategies. To demonstrate that by playing uncorrelated or correlated mixed strategies the payoff space in a game can be convexified (Section 3.6). This is some preparatory work needed for dynamic games in subsequent chapters. An application of correlated strategies is provided in Section 3.7. 2. 3. In this chapter we focus exclusively on simple static games with a discrete strategy space. The examples assume that governments can choose between two policy options; however, an extension to cover the case of larger action sets is straightforward. All games are non-cooperative and non-constant sum games. Trivially, by the definition of static games the sequence of moves is simultaneous and the time dimension and time structure are irrelevant. With respect to Table 2.1, the games in this chapter can be categorized as: 1b, 2b, 3a (b), 4a, 5a, 8a, 9a. Some aspects discussed in this and the two subsequent chapters can also be found in the...

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