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Game Theory and International Environmental Cooperation

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.
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Chapter 2: Important Terms, Notation and Classification of Games

Michael Finus


2. Important terms, notation and classification of games TERMS 2.1 The essential elements of a game are the players, actions, strategies, outcomes, payoffs, equilibria, the information and the order of the game (see, for example, Rasmusen 1989, pp. 23ff.). The players are the actors in the game who take decisions. In the international environmental context the players are countries or the political representatives of countries, such as politicians or diplomats. Players can take actions, such as making catalytic converters for automobiles mandatory or not. In contrast, a strategy is a complete plan of action for each contingency which might arise during the game. In a game comprising several stages, a strategy specifies how a player reacts at each point in time to all possible actions of fellow players. For instance, a participant to an IEA must specify an answer if a signatory to an IEA complies with its obligations but also if it violates the agreement. A particular combination of actions (resulting from the play of some strategy combination) leads to the outcome of the game. For instance, in the catalytic converter example outcomes could be measured as the nitrogen oxide concentration in the air, which depends on how many and which governments introduce stricter car regulations. Alternatively, the outcome could also be measured with respect to some other environmental index. The choice will depend on the focus of the analysis (Rasmusen 1989, p. 25). However, since game theory is mainly concerned with predicting which of the...

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