Dynamic Regularization of Self-Enforcing International Environmental Agreement in the Game of Heterogeneous Players

In the presented paper we consider a coalition formation game with heterogeneous players, where a central issue is a problem of international cooperation towards pollution control. The main concern is to provide a better insight into asymmetric pattern and characterize size and structure of a stable agreement when abatement target is succeeded over a fixed and finite period of time. For this purpose we suppose that all nations are allocated among $K$ groups with respect to their welfare function. To define a voluntary membership of an international environmental agreement (IEA), we apply the concept of a self-enforcing coalition from oligopoly literature and determine equilibrium abatement commitments for each nation. We have assumed that once a self-enforcing IEA emerges, signatories decide to perform the required emission reduction uniformly. As soon as the formed coalition initiates activities on emission decrease and the first results are observable, further agreement stability can be in danger. Withdrawal of some nations from the agreement and accessing of others would imply that the coalition will undergo structural change, which in its turn causes sequential switch to another abatement goal. Presented analyses and examples reveal the following results. Self-enforcing IEA, which performs pollution decrease according to uniform scheme, that has been myopically picked up at the initial moment, is stable only over a certain part of the path. Once abatement has reached a threshold level, external stability fails and free-riders have incentives to access the agreement. This occurs because the uniform pollution reduction scheme sets abatement targets, which differ from optimal ones both for IEA members and free-riders. To protect the coalition against free-riding, we shall continue with constructing a dynamic abatement scheme, which goes along with optimal choice and can depict agreement time-consistency.