International Environmental Agreements as an Equilibrium Choice in a Differential Game

• Environmental and Resource Economics Workshop

Date and Location

Wednesday, March 14, 2018, 3:40 PM - 5:00 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

In a differential game for international pollution control, Dockner and Long (Dockner, E.J. and N.V. Long (1993) “International Pollution Control: Cooperative versus Noncooperative Strategies,” Journal of Environmental Economics and Management 25: 13-29) show the existence of multiple Markov Nash equilibria and suggest the interpretation that an international environmental negotiation may be a preplay communication to choose a better Nash equilibrium. Following their idea, we examine the payoff dominant equilibrium in Markov perfect Nash equilibria (MPNEs) and open-loop Nash equilibria (OLNEs). By allowing a discontinuous strategy, we reproduce the Dockner and Long’s most conservative equilibrium as an MPNE (the DL MPNE), with the globally asymptotically stable steady state which converges to an efficient steady state as the discount rate goes to zero. We show that the DL MPNE is payoff dominant over the pollution levels greater than or equal to the steady state in the MPNEs. When an open-loop strategy is also available, there is a unique OLNE and it may dominate the DL MPNE if the pollution level is high. This indicates that a renegotiation to switch from the OLNE to the DL MPNE may occur when pollution is improved.