Signaling in international environmental agreements: the case of early and delayed action

International Environmental Agreements: Politics, Law and Economics volume 12, pages 309–325 (2012)Cite this article

Abstract

This paper presents a stylized international environmental agreements game with two regions differing in their preference for environmental quality. If side payments are allowed, cooperation can increase the payoffs accruing to both regions. However, cooperation can be impeded by asymmetric information about the regions’ types and only become feasible once a region has credibly revealed its type. We show how in a two-stage game early (delayed) action can act as a credible signal to reveal private information on high (low) benefits. Yet, the cooperative solution with asymmetric information is Pareto-dominated by the outcome with perfect information.

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Notes

  1. 1.

    See Walsh (2007) for a review of signaling applied to the theory of international relations.

  2. 2.

    Formally, this model is similar to Caparrós et al. (2004), where informational advantages can improve a region’s bargaining position.

  3. 3.

    The same payoff structure arises from a model with linear cost and benefit functions (as, e.g., in Barrett 1994 or Finus and Rübbelke 2008), which results in a binary choice whether abatement is performed or not (i.e., a ‘bang-bang’ solution).

  4. 4.

    For instance, Kindermann et al. (2008) point out that more than 2.000 MtCO2 can be avoided annually at a carbon price not exceeding US$ 20.

  5. 5.

    While mixed strategies are usually employed in repeated games, we argue that the relevant case of an international climate agreement has the character of a one-shot game. Hence, we restrict our analysis to pure strategies.

  6. 6.

    Hence, γ is a conversion factor between those costs/benefits that occur over the entire game and those that are terminated after non-cooperation is detected.

  7. 7.

    We do not consider the situation of a Chicken game in our analysis (cf. Pittel and Rübbelke 2012).

  8. 8.

    Benefits arguably constitute the most relevant source of asymmetric information, as they represent not only physical and economic damages, but also a willingness to pay for climate change mitigation. This also depends on normative parameters, such as intergenerational justice and concern for the environment (Gardiner 2004).

  9. 9.

    While only the players know their true type, we assume that all probabilities are common knowledge.

  10. 10.

    That is, mutual cooperation constitutes a Nash equilibrium that is Pareto-superior to the non-cooperative outcome.

  11. 11.

    That is, the transfer North has to offer to make cooperation worthwhile is the higher the lower South’s benefits b S .

  12. 12.

    Note that a transfer is always offered by North, as the (higher) transfer T + guarantees cooperation, which is Pareto-superior to free-riding for the cases considered here.

  13. 13.

    Due to the game’s information structure, South is able to anticipate North’s action without uncertainty.

  14. 14.

    In this context, a signal that credibly conveys private information not directly observable to the counterparty is an action that is worthwhile pursuing for one type of player but not for the other one (Spence 1973).

  15. 15.

    An extension of the model to continuous time is included in the electronic supplementary material.

  16. 16.

    That is, acquiring a credible signal entails social costs (that would be avoided under perfect information) and the first best outcome cannot be attained.

  17. 17.

    The perfect Bayesian equilibrium was introduced by Fudenberg and Tirole (1991). For an accessible introduction, see Gibbons (1992).

  18. 18.

    According to Bayes’s rule and given the prior μ(“North is h-type”) = p N , we have q E  = μ(“North is h-type”|“early action”) = p N /p N  = 1.

  19. 19.

    Without early action by North, mutual non-cooperation results in both stages of the game, yielding a payoff of zero.

  20. 20.

    Perhaps surprisingly, the impact of the parameter γ, which denotes the probability that cheating is detected, on the existence of a separating equilibrium is ambiguous for the case in which North’s benefits are uncertain (Eq. 12′) as well as the one in which there is uncertainty on South’s costs (Eqs. 13′ and 14′). The reason for this finding is that a higher γ decreases the minimum transfer South is willing to accept, but increases the maximum transfer North is willing to provide. Hence, the effect on the transfer T (Eq. 3) depends on the specific parameters, and this ambiguity carries over to all incentive compatibility conditions that depend on T.

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Acknowledgments

We thank Robert Marschinski, Christian Flachsland and two anonymous referees for helpful comments and suggestions.

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  1. Potsdam Institute for Climate Impact Research, P.O. Box 601203, 14412, Potsdam, Germany

    Michael Jakob & Kai Lessmann

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  1. Michael Jakob
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Correspondence to Michael Jakob.

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Jakob, M., Lessmann, K. Signaling in international environmental agreements: the case of early and delayed action. Int Environ Agreements 12, 309–325 (2012). https://doi.org/10.1007/s10784-012-9170-5

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Keywords

  • International environmental agreements
  • Climate policy
  • Asymmetric information
  • Signaling game