Leadership and Free-Riding: Decomposing and Explaining the Paradox of Cooperation in International Environmental Agreeme
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Leadership and Free‑Riding: Decomposing and Explaining the Paradox of Cooperation in International Environmental Agreements Matthew McGinty1 Accepted: 11 August 2020 / Published online: 19 August 2020 © Springer Nature B.V. 2020
Abstract This paper decomposes the canonical model of International Environmental Agreements (Barrett in Oxf Econ Pap 46:878–894, 1994) into three effects: externality, cost-effectiveness and timing. The externality and timing effects are countervailing forces on abatement levels of greenhouse gases. The Paradox of Cooperation in the three-stage Stackelberg game is explained by showing that when the gains to cooperation are small the timing effect dominates the externality effect and large coalitions are stable. The timing effect has the greatest impact when the high benefit nations have low abatement cost. The cost-effectiveness effect arises from asymmetry and generates the need for an agreement with transfers. The cost-effectiveness effect is largest when the high benefit nations are high cost. This creates a larger difference in the marginal abatement cost of the last unit of abatement in the absence of an agreement. Numerical examples illustrate how the parameters and effects interact to result in outcomes ranging from no to full participation. Keywords IEAs · Public goods · Stable coalitions · Climate change · Pollution abatement · Asymmetry · Transfers JEL Classification C7 · D7 · F5 · H4
1 Introduction Greenhouse gas abatement is arguably the most important global public good. To date, international environmental agreements (IEAs) such as the Kyoto Protocol and the Paris Climate Accord have failed to provide a framework for meaningful cooperation. The success of a climate agreement is determined by two outcomes; equilibrium participation and
* Matthew McGinty [email protected] 1
Department of Economics, University of Wisconsin-Milwaukee, Milwaukee, USA
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the abatement increase relative to no cooperation. The conventional wisdom, known as the Paradox of Cooperation, refers to the fact that at most one of these outcomes is large (Barrett 1994).1 The paradox is defined as follows. When the gains to cooperation are large, the size of a stable coalition is small. When the abatement gains are small, large coalitions can be stable. Hence, cooperation achieves the least, precisely when it is needed the most. Treaties that have high participation (such as the Montreal Protocol) merely codify the abatement those nations would have done in the absence of a treaty. This paper explains the paradox by decomposing IEAs into three main effects. The externality effect occurs as signatories to an agreement internalize the positive externality among members. The effect on signatory abatement is positive and monotonic as increases in membership result in internalizing a larger share of the global benefit. To be clear, the externality effect in this paper refers only to internalizing the benefit shares of the other members, and not to the abatement externalit
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