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International Environmental Agreements—The Role of Foresight

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Abstract

The present paper attempts to bridge the gap between the cooperative and the non-cooperative approach employed to examine the size of stable coalitions, formed to address global environmental problems. We do so by endowing countries with foresightedness, that is, by endogenizing the reaction of the coalition’s members to a deviation by one member. We assume that when a country contemplates withdrawing or joining an agreement, it takes into account the reactions of other countries ignited by its own actions. We identify conditions under which there always exists a unique set of farsighted stable IEAs. The new farsighted IEAs can be much larger than those some of the previous models supported but are not always Pareto efficient.

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Notes

  1. For an in depth comparison of the approaches see Tulkens (1998). More general literature reviews are offered by Ioannidis et al. (2000) and Finus (2003).

  2. Diamantoudi and Sartzetakis (2006) show that in the model adopted by Barrett (1994) the equilibrium size of an IEA is either 2, 3 or 4 countries. Similarly, Finus and Rundshagen (2001) show that in the model adopted by Carraro and Siniscalco (1993) when transfers are not allowed the equilibrium size of an IEA is 2 or 3 countries.

  3. It is clear, especially from the experience with the Kyoto Protocol, that signing does not necessarily imply ratification of an IEA. Although, following the literature we mostly use the term signing (signatory country), our analysis bears on the ratification of an IEA.

  4. Diamantoudi and Sartzetakis (2015) show that using general functional forms the size of the coalition could be significant, but even in such cases the level of welfare does not improve relative to the laissez-faire state where each country optimizes individually.

  5. The point of intersection between \(\omega _{s}(s)\) and \(\omega _{ns}(s)\) when s is a real number has been identified independently by Rutz and Borek (2000), but the authors did neither identify the relation between the two functions beyond the point of intersection, nor the fact that the point of intersection is the lowest point of \(\omega _{s}(s)\).

  6. A dominance relation is a binary relation that allows us to compare any two elements (in our case IEAs) and select the stable ones. A myopic dominance relation embeds not only the preference by the acting agent but also the ability for that agent to induce the dominant element from the dominated one. A farsighted dominance relation captures a sequence of elements whereas each acting agent prefers the ultimate outcome (end of the sequence) to his status quo, while he can only induce the next step of the sequence.

  7. Diamantoudi and Xue (2007) have applied previously vN–M’s stable sets as an equilibrium concept.

  8. This feature of the stable set is known as Internal Stability, yet we will avoid the terminology since it coincides with the one attributed to coalitions which is entirely different. Characterizing a coalition as internally stable implies that no member wishes to exit the coalition. This latter meaning of internal stability is the one we will maintain throughout the paper as formalized in Definition 1 that follows.

  9. This feature of the stable set is known as External Stability. The same problem with terminology arises here as well. We will maintain the meaning of external stability as formalized in Definition 1.

  10. Its appeal is captured and improved upon by Greenberg (1990). In the Theory of Social Situations (TOSS), a unifying approach towards cooperative and non-cooperative game theory, where any behavioral and institutional assumptions are explicitly defined, an equivalence is shown between the von Neumann and Morgenstern (vN–M) stable set and the Optimistic Stable Standard of Behavior (OSSB), a solution concept built in the spirit of vN–M stability, yet with the precise assumption of optimistic behavior explicitly formalized. TOSS amplified the pertinence of stability by recasting the dominance relation into a broader concept beyond the boundaries of a binary relation. In doing so, behavioral assumptions can be imposed on the agents, and more complex institutional settings can be analyzed.

  11. Note that through considering decreasing and increasing sequences of coalitions (through internal and external stability) we exhaust all possibilities. Allowing for simultaneous entry and exit does not add to our analysis given that countries are symmetric. Although other definitions of stability could be used, we have chosen the one defined in D’ Aspremont et al. (1983), in order to allow for direct comparison with the myopic literature’s results.

  12. Diamantoudi (2005) within the context of cartel stability in a price leadership model establishes that such a dominance relation is acyclic if the coalition members’ payoff is inreasing in the size of the coalition, that is, in our context, when \(\omega (s)\) is increasing in s.

  13. The solution of the problem is presented in Diamantoudi and Sartzetakis (2006).

  14. The three indirect welfare curves in Fig. 3 are exactly the same as in Diamantoudi and Sartzetakis (2006).

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Authors and Affiliations

  1. Department of Economics, Concordia University, Montreal, Canada

    Effrosyni Diamantoudi

  2. Department of Economics, University of Macedonia, 156 Egnatia Street, 54006, Thessaloníki, Greece

    Eftichios S. Sartzetakis

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  1. Effrosyni Diamantoudi
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  2. Eftichios S. Sartzetakis
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Correspondence to Eftichios S. Sartzetakis.

Additional information

The authors are indebted to the Journal’s Co-Editor prof. M. Finus and two referees for their insightful comments that greatly improved the exposition of the results. Sartzetakis gratefully acknowledges financial support from the Research Funding Program: “Thalis—Athens University of Economics and Business—Optimal Management of Dynamical Systems of the Economy and the Environment: The Use of Complex Adaptive Systems” cofinanced by the European Union (European Social Fund—ESF) and Greek national funds.

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Diamantoudi, E., Sartzetakis, E.S. International Environmental Agreements—The Role of Foresight. Environ Resource Econ 71, 241–257 (2018). https://doi.org/10.1007/s10640-017-0148-1

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