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 4: Finite Dynamic Games with Discrete Strategy Space: A First Approach

Michael Finus

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

Extract

4. Finite dynamic games with discrete strategy space: a first approach INTRODUCTION 4.1 In Chapter 3 it became apparent that in a static PD or a chicken game a full cooperative outcome cannot be achieved due to the free-rider incentive. Now, in a dynamic context, we have to investigate whether contingent cooperation can be established by using threats and punishments. The term ‘contingent’ emphasizes that it can never be an equilibrium strategy to cooperate unconditionally as long as there is a free-rider incentive. In order to establish contingent cooperation two requirements are necessary: first, it must be possible to check compliance; second, in case of a deviation from an agreed strategy, an appropriate punishment must be available to players. Due to the assumption of complete information, the first requirement is satisfied by definition, though in reality it may only partially be fulfilled. Whether the second requirement can be satisfied depends basically on two questions: 1. 2. How severe and credible is the punishment? Does it pay to forgo an immediate gain from free-riding in order to be rewarded by cooperation? For the first question the punishment options in a game are important. Obviously, the harsher the punishment, the higher is the potential of deterrence from cheating. However, if the player conducting the punishment also suffers some loss because of the punishment, credibility becomes an important issue. In the game theoretical literature the problem of credibility has attracted great attention and we shall deal with this...

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