Bargaining and International Environmental Agreements

Abstract

This article surveys game theoretic papers focused on the negotiation process that leads to an International Environmental Agreement. Most of the papers considered apply bargaining theory, although other approaches have been considered as well. Among other issues, the papers considered analyze: the burden sharing rule that will result from a negotiation over a global public good; the role of information asymmetries; the impact of unilateral commitments, delegation, and ratification; whether or not countries are going to form groups during the negotiation process; and the influence of the expectation of a future bargaining process on investment decisions. The basic bargaining model is optimistic, as it predicts that countries will reach an efficient agreement immediately. However, all the developments of this model surveyed afterwards are rather pessimistic and even the basic model has perverse incentives for pre-negotiation signals.

This is a preview of subscription content, access via your institution.

Notes

  1. 1.

    See Mitchell (2003) for a review of the different types of IEA that exist.

  2. 2.

    The Kyoto Protocol “ operationalizes’ the Convention. It commits industrialized countries to stabilize greenhouse gas emissions whereas the Convention itself only encourages countries to do so. See http://unfccc.int/essential_background/kyoto_protocol/items/6034.php.

  3. 3.

    A description of the different groupings of countries during the negotiations can be found at http://unfccc.int/parties_and_observers/parties/negotiating_groups/items/2714.php.

  4. 4.

    Stahl (1972) proposed a similar alternating offers model, but with finite horizon.

  5. 5.

    As already discussed, this transfer can be seen as a simple form of issue linkage, as side-payments are not necessarily monetary (I discuss below models where issue-linkage is modeled explicitly and players can choose to negotiate simultaneously or sequentially over different issues, and the order in the latter case).

  6. 6.

    The RBS converges to the asymmetric NBS if the discount rates of the agents are not identical, while it converges to the NBS if both agents share the same discount rate (in other words, the discount rates are at the origin of the asymmetry). This provides a strategic justification of the NBS and also shows that this concept should be used when the time between offers is arbitrarily small, which may be interpreted as bargaining situations in which the absolute magnitudes of the frictions in the bargaining process are small (Muthoo 1999).

  7. 7.

    The clean development mechanism allows a country with an emission–reduction commitment under the Kyoto protocol to implement emission–reduction projects in developing countries, and to obtain saleable certified emission reduction credits, which count towards meeting Kyoto targets.

  8. 8.

    The NBS has been used frequently in the IEA literature to analyze the outcome of a bargaining process [see, for example, the two-stage IEA game based on simulations in Botteon and Carraro (1997)].

  9. 9.

    See also the more policy-oriented analysis in Tirole (2012).

  10. 10.

    Rational threats, first analyzed by Nash (1953), imply that prior to negotiation of the bargaining solution, parties can commit to actions to be played in the event that bargaining fails (i.e. in conflict), and by manipulating the conflict point affect the terms of the agreement in their favor.

  11. 11.

    In Roelfsema’s (2007) model, when the median voter delegates to a person who cares more for the environment than himself, he is aware that the tax rate per unit of production will be sub-optimally high and profits too low for his taste. However, the commitment to a higher tax rate is observed by the foreign policy maker, who anticipates a higher output by his own firm. As he dislikes the pollution that comes along with higher production, this increases the equilibrium foreign tax rate. Nevertheless, in his analysis the “race to the top” induced by delegation only mitigates the race to the bottom induced by trade considerations.

  12. 12.

    By definition, a set of strategies and a family of beliefs form a sequential equilibrium if the following three conditions hold: (i) the strategies of both players are optimal in all the points of the game, given the beliefs of the North, (ii) for any information set reached the beliefs of the North are given by Bayes’ law, and (iii) the beliefs must be the limit of, at least, a sequence of reasonable beliefs (i.e. for a sequence of possible deviations).

  13. 13.

    Repeated games yield multiple subgame perfect equilibria. If renegotiation is not possible a common practice is picking a subgame-perfect equilibrium that is not strictly Pareto-dominated by any other. The problem is that many efficient subgame-perfect equilibria have inefficient continuation equilibria. Thus, when renegotiation is possible, these may not be credible. Farrell and Maskin (1989) therefore argue that for an equilibrium to be “credible,” all its continuation equilibria must also be “credible,” and that, when renegotiation is possible, that requires that all those equilibria be Pareto-undominated by other “credible” equilibria. With this concept history can affect the set of Pareto-unranked continuation equilibria, so that there can be threats, but history “cannot persuade players to do something that is jointly irrational for them in the face of a strictly Pareto-superior alternative” (Farrell and Maskin 1989).

  14. 14.

    The EU actually announced its compromise as a unilateral action before the Cancun agreement, but it has nevertheless been included in it. The EU approved its strategy until 2020 by committing to a 30 % reduction in its 1990 emissions if other industrialized countries join the effort, or 20 % if they do not. Since this was done before negotiations for the post-Kyoto agreement got started, and the EU had good chances to meet its Kyoto targets, the commitment of the EU was a priori and credible. More recently, and in preparation for COP21 in Paris, the EU has confirmed a goal of reducing emissions by at least 40 % in 20130 compared to 1990, leaving the door open for a higher target “should the outcome of the negotiation warrant a more ambitious target” [COM(2015) 81 final/2].

  15. 15.

    See Botteon and Carraro (1997) or Helm (2000) for alternative analyses of the impact of fairness considerations in burden-sharing.

References

  1. Aumann RJ (1987) Correlated equilibrium as an expression of Bayesian rationality. Econometrica 55:1–18

    Article  Google Scholar 

  2. Bac M (1996) Incomplete information and incentives to free ride on international environmental resources. J Environ Econ Manag 30:301–315

    Article  Google Scholar 

  3. Bac M, Raff H (1996) Issue-by-issue negotiations: the role of information in time preference. Games Econ Behav 13:125–134

    Article  Google Scholar 

  4. Barrett S (1994) Self-enforcing international environmental agreements. Oxf Econ Pap 46:878–894

    Google Scholar 

  5. Bayer P, Urpelainen J (2013) Funding global public goods: the dark side of multilateralism. Rev Policy Res 30(2):160–189

    Article  Google Scholar 

  6. Beccherle J, Tirole J (2011) Regional initiatives and the cost of delaying binding climate change agreements. J Public Econ 95(11–12):1339–1348

    Article  Google Scholar 

  7. Benedick RE (1998) Ozone diplomacy: new directions in safeguarding the planet, Enlarged edn. Harvard University Press, Cambridge

    Google Scholar 

  8. Benedick RE (2007) Avoiding gridlock on climate change. Issues Sci Technol 23:2

    Google Scholar 

  9. Botteon M, Carraro C (1997) Burden-sharing and coalition stability in environmental negotiations with asymmetric countries. In: Carraro C (ed) International environmental negotiations. Strategic policy issues. Edward Elgar, Cheltenham

    Google Scholar 

  10. Brandt US (2004) Unilateral actions, the case of international environmental problems. Resour Energy Econ 26:373–391

    Article  Google Scholar 

  11. Breton M, Fredj K, Zaccour G (2006) International cooperation, coalitions stability and free riding in a game of pollution control. Manch Sch 74(1):103–122

    Article  Google Scholar 

  12. Buchholz W, Konrad KA (1994) Global environmental problems and the strategic choice of technology. J Econ 60(3):299–321

    Article  Google Scholar 

  13. Buchholz W, Haupt A, Peters W (2005) International environmental agreements and strategic voting. Scand J Econ 107(1):175–195

    Article  Google Scholar 

  14. Busch LA, Horstmann IJ (2002) The game of negotiations: ordering issues and implementing agreements. Games Econ Behav 41:169–191

    Article  Google Scholar 

  15. Calvo E, Rubio SJ (2012) Dynamic models of international environmental agreements: a differential game approach. Int Rev Environ Resour Econ 6(4):289–339

    Article  Google Scholar 

  16. Camiña E, Porteiro N (2009) The role of mediation in peacemaking and peacekeeping negotiations. Eur Econ Rev 53:73–92

    Article  Google Scholar 

  17. Caparrós A, Péreau JC (2010) Coalition formation and bargaining power: theory and application to international negotiations on public goods. IPP-CSIC working paper 2010-17. Institute for Public Goods and Policies, Madrid

  18. Caparrós A, Péreau J-C (2013) Forming coalitions to negotiate north–south climate agreements. Environ Dev Econ 18:69–92

    Article  Google Scholar 

  19. Caparrós A, Péreau JC (2015) Multilateral versus sequential negotiations over climate change. IPP-CSIC working paper 2015-09. Institute for Public Goods and Policies, Madrid

  20. Caparrós A, Péreau J-C, Tazdaït T (2003) Coalition et Accords Environnementaux Internationaux. Rev Fr Econ 2(18):199–232

    Google Scholar 

  21. Caparrós A, Péreau J-C, Tazdaït T (2004) North–south climate change negotiations: a sequential game with asymmetric information. Public Choice 121(3–4):455–480

    Article  Google Scholar 

  22. Carraro C, Siniscalco D (1993) Strategies for the international protection of the environment. J Public Econ 52(3):309–328

    Article  Google Scholar 

  23. Carraro C, Sgobbi A (2008) Modelling negotiated decision making in environmental and natural resource management: a multilateral, multiple issues, non-cooperative bargaining model with uncertainty. Automatica 44:1488–1503

    Article  Google Scholar 

  24. Chae S, Yang A (1988) The unique perfect equilibrium of an N-person bargaining game. Econ Lett 28:221–223

    Article  Google Scholar 

  25. Chae S, Yang A (1994) A N-person pure bargaining game. J Econ Theory 62:86–102

    Article  Google Scholar 

  26. Chambers PE, Jensen RA (2002) Transboundary air pollution, environmental aid, and political uncertainty. J Environ Econ Manag 43:93–112

    Article  Google Scholar 

  27. Chander P, Tulkens H (1997) The core of an economy with multilateral environmental externalities. Int J Game Theory 26:379–401

    Article  Google Scholar 

  28. Chen Z (1997) Negotiating an agreement on global warming: a theoretical analysis. J Environ Econ Manag 32:170–188

    Article  Google Scholar 

  29. Compte O, Jehiel P (1995) On the role of arbitration in negotiations. CERAS-ENPC, Mimeo

    Google Scholar 

  30. Courtois P (2010) Mediation et Coordination Internationale: Le poids du président des negotiations. Rev Écon Polit 120:973–989

    Google Scholar 

  31. Courtois P, Tazdaït T (2008) Accord climatique: Concessions et ratifications. Rev Écon 59:719–735

    Article  Google Scholar 

  32. Courtois P, Tazdaït T (2014) Bargaining over a climate deal: deadline and delay. Ann Oper Res 220(1):205–221

    Article  Google Scholar 

  33. d’Aspremont C, Jacquemin A, Gabszewicz JJ, Weymark JA (1983) On the stability of collusive price leadership. Can J Econ 16(1):17–25

    Article  Google Scholar 

  34. Endres A (1997) Negotiating a climate convention—the role of prices and quantities. Int Rev Law Econ 17:147–156

    Article  Google Scholar 

  35. Endres A, Finus M (1999) International environmental agreements: how the policy instrument affects equilibrium emissions and welfare. J Inst Theor Econ 155(3):527–550

    Google Scholar 

  36. Eraslan H, Merlo A (2002) Majority rule in a stochastic model of bargaining. J Econ Theory 103:31–48

    Article  Google Scholar 

  37. Espinola-Arredondo A, Muñoz-García F (2011) Free-riding in international environmental agreements: a signaling approach to non-enforceable treaties. J Theor Polit 23(1):111–134

    Article  Google Scholar 

  38. Farrell J, Maskin E (1989) Renegotiation in repeated games. Games Econ Behav 1:327–360

    Article  Google Scholar 

  39. Fershtman C (1990) The importance of the agenda in bargaining. Games Econ Behav 2:224–238

    Article  Google Scholar 

  40. Fershtman C (2000) A note on multi-issue two-sided bargaining: bilateral procedures. Games Econ Behav 30:216–227

    Article  Google Scholar 

  41. Fey M, Ramsay KW (2010) When is shuttle diplomacy worth the commute? Information sharing through mediation. World Polit 62(4):529–560

    Article  Google Scholar 

  42. Finus M (2001) Game theory and international environmental cooperation. Edward Elgar, Cheltenham

    Google Scholar 

  43. Finus M (2003) Stability and design of international environmental agreements: the case of global and transboundary pollution. In: Folmer H, Tietenberg T (eds) International yearbook of environmental and resource economics 2003/2004. Edward Elgar, Cheltenham, pp 82–158

    Google Scholar 

  44. Finus M, Rundshagen B (1998) Toward a positive theory of coalition formation and endogenous instrumental choice in global pollution control. Public Choice 96(1–2):145–186

    Article  Google Scholar 

  45. Finus M, Pintassilgo P (2013) The role of uncertainty and learning for the success of international climate agreements. J Public Econ 103:29–43

    Article  Google Scholar 

  46. Finus M, Caparrós A (2015) Game theory and international environmental cooperation: essential readings. Edward Elgar, Cheltenham

    Google Scholar 

  47. Forgo F, Fülöp J, Prill M (2005) Game theoretic models for climate change negotiations. Eur J Oper Res 160:252–267

    Article  Google Scholar 

  48. Fudenberg D, Tirole J (1983) Sequential bargaining with incomplete information. Rev Econ Stud 50(2):221–247

    Article  Google Scholar 

  49. Gatti R, Goeschl T, Groom B, Swanson T (2011) The biodiversity bargaining problem. Environ Resour Econ 48:609–628

    Article  Google Scholar 

  50. Gomes A (2005) Multilateral contracting with externalities. Econometrica 73(4):1329–1350

    Article  Google Scholar 

  51. Haller H, Holden S (1997) Ratification requirement and bargaining power. Int Econ Rev 38(4):825–846

    Article  Google Scholar 

  52. Hampson O, Hart M (1995) Multilateral negotiations: lessons from arms control, trade, and the environment. The Johns Hopkins University Press, Baltimore

    Google Scholar 

  53. Harsanyi J (1967) Games with incomplete information played by Bayesian players. Manag Sci 14:159–182

    Article  Google Scholar 

  54. Harstad B (2007) Harmonization and side payments in political cooperation. Am Econ Rev 97(3):871–889

    Article  Google Scholar 

  55. Harstad B (2008) Do side payments help? Collective decisions and strategic delegation. J Eur Econ Assoc 6(2–3):468–477

    Article  Google Scholar 

  56. Harstad B (2012) Climate contracts: a game of emissions, investments, negotiations, and renegotiations. Rev Econ Stud 79(4):1527–1557

    Article  Google Scholar 

  57. Harstad B (2015) The dynamics of climate agreements. J Eur Econ Assoc. doi:10.1111/jeea.12138

  58. Helm C (2000) Economic theories of international environmental cooperation. Edward Elgar, Cheltenham

    Google Scholar 

  59. Helm C (2001) On the existence of a cooperative solution for a coalitional game with externalities. Int J Game Theory 30(1):141–146

    Article  Google Scholar 

  60. Helm C, Wirl F (2014) The principal–agent model with multilateral externalities: an application to climate agreements. J Environ Econ Manag 67(2):141–154

    Article  Google Scholar 

  61. Herrero MJ (1985) N-player bargaining and involuntary unemployment. Ph.D. dissertation, LSE, London

  62. Hoel M (1991) Global environmental problems: the effects of unilateral actions taken by one country. J Environ Econ Manag 20:55–70

    Article  Google Scholar 

  63. Hovi J (2001) Decentralized enforcement, sequential bargaining, and the clean development mechanism. Nord J Polit Econ 27:135–152

    Google Scholar 

  64. Huang C-Y (2002) Multilateral bargaining: conditional and unconditional offers. Econ Theory 20:401–412

    Article  Google Scholar 

  65. Iida K (1993) When and how do domestic constraints matter? Two-level games with uncertainty. J Confl Resolut 37:403–426

    Article  Google Scholar 

  66. In Y, Serrano R (2003) Agenda restrictions in multi-issue bargaining (II): unrestricted agendas. Econ Lett 79:325–331

    Article  Google Scholar 

  67. In Y, Serrano R (2004) Agenda restrictions in multi-issue bargaining. J Econ Behav Organ 53:385–399

    Article  Google Scholar 

  68. Inderst R (2000) Multi-issue bargaining with endogenous agenda. Games Econ Behav 30:64–82

    Article  Google Scholar 

  69. Jakob M, Lessmann K (2012) Signaling in international environmental agreements: the case of early and delayed action. Int Environ Agreem Polit Law Econ 12(4):309–325

    Google Scholar 

  70. Jones SR (1989) Have your lawyer call my lawyer. J Econ Behav Organ 11:159–174

    Article  Google Scholar 

  71. Jun BH (1987) A structural consideration on 3-person bargaining. Department of Economics, University of Pennsylvania, Philadelphia

    Google Scholar 

  72. Kempf H, Rossignol S (2013) National politics and international agreements. J Public Econ 100:93–105

    Article  Google Scholar 

  73. Kolstad CD (2007) Systematic uncertainty in self-enforcing international environmental agreements. J Environ Econ Manag 53(1):68–79

    Article  Google Scholar 

  74. Konrad KA, Thum M (2014) Climate policy negotiations with incomplete information. Economica 81(322):244–256

    Article  Google Scholar 

  75. Kreps D, Wilson R (1982) Sequential equilibria. Econometrica 50:863–984

    Article  Google Scholar 

  76. Krishna V, Serrano R (1996) Multilateral bargaining. Rev Econ Stud 63:61–80

    Article  Google Scholar 

  77. Long NV (1992) Pollution control: a differential game approach. Ann Oper Res 37:283–296

    Article  Google Scholar 

  78. Manzini P, Mariotti M (2001) Perfect equilibria in a model of bargaining with arbitration. Games Econ Behav 37:170–195

    Article  Google Scholar 

  79. Merlo A, Wilson C (1995) A stochastic model of sequential bargaining with complete information. Econometrica 63:371–399

    Article  Google Scholar 

  80. Mitchell RB (2003) International environmental agreements: a survey of their features, formation, and effects. Annu Rev Environ Resour 28:429–461

    Article  Google Scholar 

  81. Muthoo A (1999) Bargaining theory with applications. Cambridge University Press, Cambridge

    Google Scholar 

  82. Na S-L, Shin HS (1998) International environmental agreements under uncertainty. Oxf Econ Pap 50(2):173–185

    Article  Google Scholar 

  83. Nash J (1953) Two-person cooperative games. Econometrica 21(1):128–140

    Article  Google Scholar 

  84. Okada A (2007) International negotiations con climate change: a noncooperative game analysis of the Kyoto protocol. In: Avenhaus R, Zartman IW (eds) Diplomacy games. Springer, Berlin

    Google Scholar 

  85. Osborne M, Rubinstein A (1990) Bargaining and market. Academic Press, London

    Google Scholar 

  86. Peinhardt C, Sandler T (eds) (2015) Environmental cooperation. In: Transnational cooperation: an issue-based approach. Oxford University Press, Oxford, pp 259–281

  87. Pinto LM, Harrison GW (2003) Multilateral negotiations over climate change policy. J Policy Model 25:911–930

    Article  Google Scholar 

  88. Powell R (1999) In the shadow of power: states and strategies in international politics. Princeton University Press, Princeton

    Google Scholar 

  89. Putnam RD (1988) Diplomacy and domestic policies: the logic of two-level games. Int Organ 52:427–460

    Article  Google Scholar 

  90. Rausser G, Simon L (1992) A noncooperative model of collective decision making: a multilateral bargaining approach. Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley

    Google Scholar 

  91. Roelfsema H (2007) Strategic delegation of environmental policy making. J Environ Econ Manag 53:270–275

    Article  Google Scholar 

  92. Rotillon G, Tazdaït T (1996) International bargaining in the presence of global environmental change. Environ Resour Econ 8:293–314

    Google Scholar 

  93. Rotillon G, Tazdaït T, Zeghni S (1996) Bilateral or multilateral bargaining in the face of global environmental change? Ecol Econ 18:177–187

    Article  Google Scholar 

  94. Rubinstein A (1982) Perfect equilibrium in a bargaining model. Econometrica 50:97–109

    Article  Google Scholar 

  95. Rubinstein A (1985) A bargaining model with incomplete information about time preferences. Econometrica 53:1151–1172

    Article  Google Scholar 

  96. Rubinstein A (1988) Choice of conjectures in a bargaining game with incomplete information. In: Roth Alvin E (ed) Game theoretic models of bargaining. Cambridge University Press, Cambridge

    Google Scholar 

  97. Segendorff B (1998) Delegation and threat in bargaining. Games Econ Behav 23:266–283

    Article  Google Scholar 

  98. Schelling TC (1956) An essay on bargaining. Am Econ Rev 46(3):281–306

    Google Scholar 

  99. Schelling TC (1960) The strategy of conflict. Harvard University Press, Cambridge

    Google Scholar 

  100. Shum RY (2014) China, the United States, bargaining, and climate change. Int Environ Agreem 14:83–100

    Article  Google Scholar 

  101. Stahl S (1972) Bargaining theory. Economic Research Institute, Stockholm School of Economics, Stockholm

    Google Scholar 

  102. Suh S-C, Wen Q (2006) Multi-agent bilateral bargaining and the Nash bargaining solution. J Math Econ 42(1):61–73

    Article  Google Scholar 

  103. Suh S-C, Wen Q (2009) A multi-agent bilateral bargaining model with endogenous protocol. Econ Theory 40:203–226

    Article  Google Scholar 

  104. Sutton J (1986) Non-cooperative bargaining theory: an introduction. Rev Econ Stud 53:709–724

    Article  Google Scholar 

  105. Swanson T, Groom B (2012) Regulating global biodiversity: what is the problem? Oxf Rev Econ Policy 28(1):114–138

    Article  Google Scholar 

  106. Tarar A (2001) International bargaining with two-sided domestic constraints. J Confl Resolut 45(3):320–340

    Article  Google Scholar 

  107. Tarar A (2005) Constituencies and preferences in international bargaining. J Confl Resolut 49(3):383–407

    Article  Google Scholar 

  108. Tirole J (2012) Some political economy of global warming. Econ Energy Environ Policy 1(1):121–132

    Article  Google Scholar 

  109. Urpelainen J (2012) Technology investment, bargaining, and international environmental agreements. Int Environ Agreem 12:145–163

    Article  Google Scholar 

  110. van der Ploeg F, de Zeeuw A (1992) International aspects of pollution control. Environ Resour Econ 2(2):117–139

    Article  Google Scholar 

  111. Wagner UJ (2001) The design of stable international environmental agreements: economic theory and political economy. J Econ Surv 15(3):377–411

    Article  Google Scholar 

  112. Wangler L, Altamirano-Cabrera JC, Weikard HP (2013) The political economy of international environmental agreements: a survey. Int Environ Agreem 13:387–403

    Article  Google Scholar 

  113. Ward H, Grundig F, Zorick ER (2001) Marching at the pace of the slowest: a model of international climate-change negotiations. Polit Stud 49:438–461

    Article  Google Scholar 

Download references

Acknowledgments

I gratefully acknowledge the financial support from the MEC (Spanish Ministry of Economy and Competitiveness), through the project ACBPA (ECO2012-35432). The ideas presented in this paper have greatly benefitted from discussions with several colleagues, in particular Tarik Tazdaït, Jean-Christophe Péreau and Michael Finus. The comments from three anonymous referees are also gratefully acknowledged.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Alejandro Caparrós.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Caparrós, A. Bargaining and International Environmental Agreements. Environ Resource Econ 65, 5–31 (2016). https://doi.org/10.1007/s10640-016-9999-0

Download citation

Keywords

  • Bargaining theory
  • Negotiations
  • International
  • Climate change
  • Biodiversity
  • Survey

JEL Classification

  • C78
  • H41
  • Q54