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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 10: Finite Dynamic Games with Continuous Strategy Space and Static Representations of Dynamic Games

Michael Finus


INTRODUCTION 10.1 From the previous chapter it became evident that in a static setting there is underprovision of the public good ‘environmental quality’. In the Nash equilibrium global emissions are too high from a global point of view. Thus one may wonder whether more positive results could be obtained in a dynamic, though finite time horizon. This question will be analyzed within two approaches. The first approach remains in the tradition of repeated games, as encountered in previous chapters. More precisely, we proceed as in Chapter 4: first the equilibrium (or the equilibria) of the constituent game is determined; and second, one investigates whether the finitely repeated play of the stage game leads to more optimistic results. Again, a simultaneous and a sequential move version of the constituent game can be distinguished. In the former case the analysis is simple. If the constituent game is the global emission game described in Chapter 9, where there is a unique Nash equilibrium (NE) due to assumption A1, the repeated play of this stage game NE is the only equilibrium in a finite time horizon. This is an immediate implication of Theorem 4.2. In the case of sequential moves, it is shown in Section 10.2 that there is a unique subgame-perfect equilibrium (SPE) of the emission stage game and hence, again, by Theorem 4.2, the finitely repeated play of this stage game equilibrium is the only equilibrium of the overall game. Thus, the outcome in the finitely repeated emission game does not di...

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