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 7: Infinite Dynamic Games with Discrete Strategy Space: A Second Approach

Michael Finus

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

Extract

7. Infinite dynamic games with discrete strategy space: a second approach WEAKLY RENEGOTIATION-PROOF EQUILIBRIA The Concept1 7.1 7.1.1 In Chapter 6 it became clear that by requiring strategies to be renegotiation-proof the number of equilibria in repeated games could be substantially reduced. Moreover, requiring strategies to constitute a strongly perfect equilibrium reduced the set of equilibria even further. However, it turned out that for many games for which a renegotiation-proof equilibrium exists, no strongly perfect equilibrium can be found. For finite games an obvious way to define a Pareto-efficient subgameperfect strategy involved a recursive definition. Now, in an infinite time horizon, such a definition is not available, which leaves some leeway for finding an adequate formulation of what renegotiation-proofness means for supergames. Since Farrell and Maskin’s (1989a, b) definition has probably found the most widespread application in the literature, we concentrate exclusively on their concept of weakly and strongly renegotiationproof equilibria.2 It should be mentioned that the authors exclusively restrict the validity of their concept to two-player games and we follow this assumption in this chapter too. The possibility of an extension to N-player games will be discussed in Chapter 14. Farrell and Maskin’s definition of a weakly renegotiation-proof equilibrium (WRPE) takes up the central idea of the previous chapter that an equilibrium strategy should have no Pareto-dominated continuation payoff in any subgame. In particular, in the ‘punishment subgame’ the punisher should not find it attractive to skip the punishment. Once more,...

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