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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 13: Coalition Models: A First Approach

Michael Finus


13. 13.1 Coalition models: a first approach INTRODUCTION In the remaining chapters we are concerned with the coalition formation process in an N-country world. Though many of the previous results have either already been derived for more than two countries or could easily be extended to the case of NϾ2, the possibility that sub-groups of players may form strategic alliances has been neglected. On theoretical grounds, one would like to explain an entire coalition formation process endogenously. However, it turns out that this is an extremely complex undertaking. This is because the number of possible coalition formations is usually very large. For instance, there may be not only a group of signatories and non-signatories, but several coalitions may coexist. On the one hand, signatories may split up into sub-groups with homogeneous interests since within the group of ‘environmentally conscious’ countries no agreement on abatement obligations may be possible. On the other hand, there is a possibility that less environmentally concerned countries could form a coalition to defend their interests. However, things are even more complex. The decision to join a particular coalition depends not only on the abatement obligations of its members but also on the abatement strategy of other coalitions or single players and the possible transfer scheme (for example, in order to compensate some players) within this particular coalition and within alternative coalitions. Thus the payoff of a country depends on the strategy triple membership, emission allocation and transfer scheme where the strategy choices of players in...

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