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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 15: Coalition Models: A Third Approach

Michael Finus


INTRODUCTION A drawback of the coalition models discussed in the previous chapters is that they exogenously assume that there is a group of players which cooperate (signatories) and a second group of players which play as singletons (non-signatories). However, a priori, it is not clear whether equilibria in which several coalitions coexist can be excluded. Suppose such equilibria actually exist. Then the assumption of the previous models that an equilibrium coalition must only be immune to deviations by a single country may no longer be adequate. Then, a coalition structure should only be called an equilibrium if it is not challenged by any kind of deviation, regardless of whether a single country or a sub-group of countries deviates. The aim of this chapter is to discuss some recent developments in the game theoretical literature on the formation of coalitions which allow for the coexistence of several coalitions. Most of these concepts have not yet been applied to the problem of international pollution control. Of those which have been applied to similar problems, only very general results have been derived, making it difficult to draw sound conclusions of practical relevance.1 The subsequent discussion therefore pays particular attention to introducing the reader to the idea of these concepts and to evaluate them with respect to a possible application in future research. A simple example will illustrate the basic ideas of these concepts. All subsequent concepts belong to the realm of non-cooperative game theory, though some of them have been developed from...

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