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 9: Static Games with Continuous Strategy Space: Global Emission Game

Michael Finus

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


INTRODUCTION 9.1 Up to now we have assumed that players have discrete action sets so that the normal form of the game could conveniently be displayed in a matrix. Though for many policy problems modeling decisions as a discrete choice seems adequate, other situations may be better modeled as a continuous choice problem such as the amount of emission reduction in a global policy game, for example, greenhouse gases (see also the discussion in Section 2.3). A continuous strategy set allows finer tuning of actions and reactions and therefore leads to some interesting results which are absent in discrete policy games. This is true at least as long as mixed strategies are ruled out for discrete policy games. Though we dealt with mixed strategies in Chapter 3 and also mentioned some instances in which one can expect players to use mixed strategies, they were introduced mainly for technical reasons; that is, mixed strategies were required in the discrete strategy context to capture the entire feasible payoff space when deriving folk theorem type results. In a continuous strategy setting it suffices to consider only pure strategies. This is true at least as long as games with a convex payoff space are considered. Since all games in the remainder of this book satisfy this condition, we no longer have to bother about mixed strategies. The following analysis is based on a rather simple emission model. In particular, the payoff or net benefit functions contain emissions as the only argument. Thus,...

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