Modesty May Pay!

• Published date: 01 October 2008
• Author: STEFAN MAUS,MICHAEL FINUS
• DOI: http://doi.org/10.1111/j.1467-9779.2008.00387.x
• Date: 01 October 2008

MODESTY MAY PAY!

MICHAEL FINUS

University of Stirling

STEFAN MAUS

University of Hagen

Abstract

Most noncooperative game theoretic models of interna-

tional environmental agreements (IEAs) draw a pessimistic

picture of the prospective of successful cooperation. In this

paper, we consider the possibility that countries agree on

modest instead of ambitious abatement targets. It is shown

that this can be an explanation for higher participation and

more successful treaties. Thus, modesty may well pay,though

the first-best optimum cannot be achieved. It is also demon-

strated that our model extension makes it easier to relate the

stylized model to actual negotiations.

1. Introduction

Most noncooperative game theoretic models of international environmental

agreements (IEAs) draw a rather pessimistic picture of the prospective of

successful cooperation between countries.1In particular, whenever the gains

from cooperation would be large, coalitions achieve relatively little. A large

amount of the literature has come to this conclusion in a two-stage coalition

game.2In the first stage, countries decide upon their membership. In the

Michael Finus, Department of Economics, University of Stirling, Stirling FK9 4LA, Scot-

land, UK (Michael.Finus@stir.ac.uk). Stefan Maus, Department of Economics, University

of Hagen, Profilstr. 8, 58084 Hagen, Germany (MausStefan@web.de).

The authors have benefited from discussions with Carlo Carraro, Alfred Endres, Michael

Hoel, and Rajiv Vohraat various conferences. They would also like to thank two anonymous

referees for helpful comments.

Received September 11, 2006; Accepted May 13, 2008.

1More positive results are derived from cooperative game theory. See for instance Chander

and Tulkens (1995, 1997).

2Similar conclusions have emerged for repeated games by applying the concept of

renegotiation-proof strategies. See for instance Barrett (1994, 1999) and Finus and Rund-

shagen (1998).

C

2008 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 10 (5), 2008, pp. 801–826.

801

802 Journal of Public Economic Theory

second stage, coalition members decide on their emission levels. The out-

come of this process depends on a number of assumptions.3The “standard

set of assumptions”includes: (a) In the first stage, countries can only choose

to become a member of an IEA (usually referred to as signatories) or remain

outside as a singleton (usually referred to as nonsignatory) which is often

called the cartel formation game. (b) The decision in the first stage is taken

simultaneously. (c) In the second stage, countries choose their emissions

based on their payoff functions which comprise only benefits from individual

emissions and damage costs from global emissions.4(d) The decision in the

second stage is taken simultaneously (Nash-Cournot assumption). (e) This

decision follows from the assumption of joint welfare maximization. Signa-

tories maximize the aggregate payoff to their coalition, singletons maximize

their own payoff.

For this standard set of assumptions, it turns out that for a large set of

payoff functions the equilibrium number of signatories is small and stable

coalitions improve only marginally upon the noncooperative status quo (e.g.,

Carraro and Siniscalco 1993 and Hoel 1992). The reason is that free-rider

incentives increase with the number of signatories and consequently internal

stability is already violated for small coalitions. Clearly, the standard model

helps explaining the problems of international cooperation in the presence

of environmental spillovers, but cannot explain IEAs with high participation

like the Montreal Protocol. This requires a modification of the standard as-

sumptions. For example Barrett (1994) and Rubio and Ulph (2006) modify

assumption (d) above and consider Stackelberg leadership of signatories. De-

pending on the parameters of the benefit and damage cost function, larger

and more successful coalitions are stable. However, the general negative con-

clusion remains: whenever cooperation would be needed most from a global

point of view, stable coalitions achieve only little.

Other modifications that have been analyzed in the literature which help

to explain a higher participation and/or more successful coalition formation

include for instance in the context of the cartel formation game: (1) com-

mitment of signatories (Botteon and Carraro 1997, Carraro and Siniscalco

1993 and Petrakis and Xepapadeas 1996), (2) reputation effects (Jeppesen

and Andersen 1998 and Hoel and Schneider 1997) or preference for eq-

uity (Lange and Vogt 2003 and Peters and Schuler 2006), (3) issue linkage

(Barrett 1997 and Carraro and Siniscalco 1997),5(4) minimum participation

clauses (Carraro, Marchiori, and Oreffice 2003 and Courtois and Haeringer

3For an overview, see Barrett (2003) and Finus (2001, 2003).

4An alternative specification of this model with the same qualitative results assumes coun-

tries strategies to be abatement from some base emission level. For details on the correct

conversion of different versions, see Diamantoudi and Sartzetakis (2006) and Rubio and

Ulph (2006).

5The idea goes back to Folmer,Van Mouche, and Ragland (1993) who analyze issue linkage

in a repeated game.