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 8: Issue Linkage

Michael Finus

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


INTRODUCTION So far we have considered only single-issue games. However, relations between governments may also concern several issues. For instance, governments may negotiate on the reduction of sulfur emissions and on the reduction of greenhouse gases at the same time, or talk about the creation of a free-trade area and disarmament issues simultaneously. Issue linkage may be able to stabilize an agreement in three respects: first and most importantly, issue linkage may lead to a more symmetric distribution of the gains from cooperation; second, issue linkage may ease the enforcement of an agreement – a government can threaten to withdraw from all treaties if a country free-rides with respect to one issue; third, an agreement regulating a public good, like a global pollutant, may be linked to an agreement regulating the provision of a club good. Since the benefits of the ‘club good agreement’ can be made exclusive to its members, requiring participants to hold a simultaneous membership in both agreements may be able to stabilize the public good agreement. The first aspect is the most frequently treated in the literature and is referred to in the following as the ‘enlargement of payoff space’ (Section 8.2). The typical framework is that of a supergame and the following exposition draws on work done by Cesar and de Zeeuw (1996); Folmer et al. (1993); Kroeze-Gil and Folmer (1998); and Ragland et al. (1996). The effect of issue linkage in the context of finite games will be treated in Section 8.3. Whereas...

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