At the first stage of our research where the theoretical foundations were built we built three distinct models and analyses.
In particular, we investigated how rational individuals partition themselves into different coalitions. We proposed a notion that determines simultaneously the coalition structures that are likely to prevail in a game, as well as the feasible payoff configurations associated with them. We proved existence for a general class of games, and investigated the efficiency of our solution.
Along the same lines of theoretical foundations we extended the basic model of IEA formation and examined the stability of self-enforcing International Environmental Agreements (IEAs) among heterogeneous countries in a two-stage emission game. We found that the introduction of heterogeneity did not yield larger stable coalitions, contrary to expectation in the literature. In particular, we showed that, in the case of two types, when stable coalitions exist their size is very small, and, if the asymmetry is strong enough, they include only one type of countries. Moreover, we demonstrated that heterogeneity can reduce the scope of cooperation relative to the homogeneous case by disturbing stability.
Lastly we examined the stability of IEAs among heterogeneous countries while allowing for transfers. Results showed that transfers can increase cooperation. Nonetheless, the increase in the coalition size comes only from countries belonging to the type with the lower environmental damages, which are drawn into the coalition by the transfers offered. Furthermore, the level of cooperation increases with the degree of heterogeneity.
At the second stage of our research we expanded the basic models of IEA formation by introducing other instruments and parameters that influence the formation.
We examined the stability of IEAs in an economy with trade. We extended the basic model of IEAs by letting countries choose emission taxes and import tariffs as their policy instruments in order to manage climate change and control trade. We defined the equilibrium of a three stage emission game. Numerical analysis illustrated that the interaction between trade and environment policies is essential in enhancing cooperation. Contrary to the basic IEA model, stable agreements are larger and more efficient in reducing aggregate emissions and improving welfare. Moreover, the analysis showed that the size of a stable agreement increased in the number of countries affected by the externalities.
The Environmental Kuznets Curve (EKC) hypothesis postulates an inverted U-shaped relationship between emissions and per capita income. The theoretical models developed to explain this stylized fact suggest that the EKC depends on various factors. This study investigated the income-pollution path in a multicountry framework that interacts. It is shown that an EKC can be obtained in this set up for a rich set of parameters, without any stringent conditions imposed on technology. Comparative static analysis is conducted to examine the role of such parameters. Moreover, the relationship between EKC and income distribution is explored. The connection between emission reduction and growth can improve IEA formation indirectly as it enhances the benefits a country accrues by cooperating.
The above results lead to the drafting of five working papers. Three of these papers have been circulated in the most prestigious open access working paper series in the area of environmental economics that circulates widely through SSNR and Repec.
