Author's Personal Copy International Environmental Agreements with Mixed Strategies and Investment ☆

In most cases authors are permitted to post their version of the article (e.g. in Word or Tex form) to their personal website or institutional repository. Authors requiring further information regarding Elsevier's archiving and manuscript policies are encouraged to visit: a b s t r a c t a r t i c l e i n f o We modify a canonical participation game used to study International Environmental Agreements (IEA), considering both mixed and pure strategies at the participation stage, and including a prior cost-reducing investment stage. The use of mixed strategies at the participation stage reverses a familiar result and also reverses the policy implication of that result: with mixed strategies, equilibrium participation and welfare are higher in equilibria that involve higher investment. Limiting increases in Greenhouse Gas (GHG) stocks requires an international effort. The global nature of GHG pollution and the fact of national sovereignty complicate the usual problems of eliciting the provision of a public good, in this case, reduction of GHG emissions. International Environmental Agreements (IEAs) attempt to alleviate the free riding problem associated with transboundary pollution. Although there are many examples of successful IEAs, these do not involve problems on the same scale as climate change. In the absence of historical analogies, economic theory plays an especially important role in helping to think about ways of addressing the climate policy problem. The literature on IEAs uses both non-cooperative and cooperative game theories. A major non-cooperative strand uses the definition of cartel stability in a participation game (D'Aspremont et al., 1983). In this game, countries first make a binary decision, whether to join or stay out of an IEA, and then the resulting IEA decides on the level of abatement. review this literature. IEA members internalize the effect of their actions on other members, while non-members ignore the externalities. A stable IEA is both internally stable (members do not want to defect) and externally stable (outsiders do not want to join); that is, the equilibrium at the participation stage is Nash in the binary participation decision. These models are generally pessimistic about the equilibrium level of participation, and they suggest that IEAs are especially ineffective when potential benefits of cooperation are large (Ioannidis et al. show that IEAs may not be able to improve substantially upon the non-cooperative outcome even when countries are heterogeneous. Karp and Simon (2011) reconsider these issues using a non-parametric …