Designing international environmental agreements under participation uncertainty

Abstract

Traditional international environmental agreement (IEA) models usually use some specific contribution rules, which either fail to provide sufficient incentives for cooperation, or ignore the loss from participation uncertainty. Can more general rules overcome these problems and improve the performance of IEAs? This paper analyzes the endogenous determination of contribution rules from a class of general rules through a three-stage coalition formation game under participation uncertainty. In stage one, a designer chooses a contribution rule, which, depending on the size of the signatories’ coalition formed in stage two, specifies the action each signatory should take in stage three. A contribution rule is said to be optimal when it maximizes the expected payoff of signatories. We provide an algorithm to determine an optimal rule. When uncertainty is either sufficiently large or equal to zero, the optimal rule coincides with some existing rules in the literature. However, when the uncertainty is neither large nor small, the optimal rule outperforms other rules in terms of signatories’ payoff.