The problem of financing global public goods

Abstract

A longstanding result from decades of research on the provision of global public goods, is that stable coalitions of cooperating countries are small when the benefits to cooperating are large. This “paradox” of cooperation is seemingly overcome in a recent paper “The Strategic Dimension of Financing Global Public Goods”, by Kornek and Edenhofer (2020). The authors propose a global-public goods game in which countries finance a compensation fund that can balance abatement costs among members. The fund is based on financial transfers, and in the often-explored case of linear benefits and quadratic costs, the proposed institution is credited as being able to support a stable grand coalition. However, when looking carefully at the model, the promising result relies on assumptions and features of an international institution that are not credible because they restrict members’ rights to opt out. The institution’s success relies on countries being required to transfer funds in response to below-average abatement levels. In this short paper we show that when countries have the outside option to renege on the terms of the agreement, no money would be transferred and the institution proposed by Kornek and Edenhofer (2020) reverts to the non-cooperative outcome.