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International environmental agreements with consistent conjectures |
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| Institution: | 1. Department of Economics, University of Wisconsin-Milwaukee, PO Box 413, Milwaukee, WI 53201, United States;2. University of North Texas, United States;1. Toulouse School of Economics (INRA and LERNA), France;2. University of Toulouse, Toulouse Business School, 20 bd Lascrosses, BP 7010, 31068 Toulouse Cedex 7, France;3. Toulouse School of Economics (IDEI and LERNA), France;1. Department of Economics, McGill University, and CIREQ, 855 Sherbrooke West, Montreal, QC H3A-2T7, Canada;2. Department of Economics, The University of Winnipeg, 515, Portage Avenue, Winnipeg, MB, R3B 2E9, Canada;3. TILEC, the Netherlands;4. Department of Economics, School of Business Administration, American University of Sharjah, Sharjah, United Arab Emirates;1. Michigan State University, NBER, United States;2. Brown University, United States |
| Abstract: | We introduce consistent conjectures into Barrett (1994) canonical model of international environmental agreements. The existing literature assumes inconsistent Nash conjectures, despite the fact that policymakers recognize that abatement levels are strategic substitutes and increases in abatement generate carbon leakage. With consistent conjectures much of the conventional wisdom is reversed. The non-cooperative abatement level is below the Nash equilibrium. The difference between Nash and consistent conjectures is greatest when benefits are large and costs are small. We find that large coalitions cannot form. However, small coalitions can result in substantial increases in abatement relative to the non-cooperative outcome. |
| Keywords: | International environmental agreements Consistent conjectures Coalition formation Public goods Externalities |
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