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 6: Finite Dynamic Games with Discrete Strategy Space: A Second Approach

Michael Finus

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


INTRODUCTION 6.1 In Section 4.4 we demonstrated that in games with two or more stage game Nash equilibria (NE) all payoff vectors can be sustained by subgameperfect equilibrium strategies which give each player more than in his/her worst NE provided discount factors are close to 1. Such an abundance of equilibria was also found in supergames where even weaker conditions must be satisfied to derive folk theorem type of results. Thus, although we strengthened the equilibrium concept for dynamic games by requiring strategies not only to be an NE but also to be a subgame-perfect equilibrium (SPE), the set of equilibrium payoffs remains large. A concept which is capable of reducing (though not eliminating) this lack of predictability in repeated games is the concept of renegotiation-proofness. Though there emerged many versions of this concept, in the context of finite games the interpretation seems not very controversial (Benoît and Krishna 1993; Bergin and MacLeod 1993; Bernheim et al. 1987; Fudenberg and Tirole 1996, pp. 174ff.). The subsequent discussion is based on Benoît and Krishna’s definition which is restricted to two-player games. In this case their concept coincides with Bernheim et al.’s definition of coalitionproof equilibria, which we discuss in Chapter 15. In the above-cited literature it is argued that threats which imply a lower payoff to deviators and punishers alike will be subject to renegotiations and therefore lose their credibility. If defection occurs, it is in the interest of all players to treat bygones as...

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