Analyzing Global Environmental Issues

Ariel Dinar, Amnon Rapoport, Ariel Dinar, Amnon Rapoport

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136238949
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

The existence of environmental dilemmas and political conflicts leads us to appreciate the need for individuals and groups to behave strategically in order to achieve their goals and maintain their wellbeing. Global issues such as climate change, resource depletion, and pollution, as well as revolts and protests against corporations, regimes, and other central authorities, are the result of increased levels of externalities among individuals and nations. These all require policy intervention at international and global levels.

This book includes chapters by experts proposing game theoretical solutions and applying experimental design to a variety of social issues related to global and international conflicts over natural resources and the environment. The focus of the book is on applications that have policy implications, relevance and, consequently, could lead to the establishment of policy dialogue. The chapters in the book address issues that are global in nature, such as international environmental agreements over climate change, international water management, common pool resources, public goods, international fisheries, international trade, and collective action, protest, and revolt.

The book's main objective is to illustrate the usefulness of game theory and experimental economics in policy making at multiple levels and for various aspects related to global and international issues. The subject area of this book is already widely taught and researched, but it continues to gain popularity, given growing recognition that the environment and natural resources have become more strategic in human behavior.

1Global and environmental issues

Theoretical applications and policy implications

Ariel Dinar and Amnon Rapoport

1.1 Introduction

A growing number of environmental dilemmas and political conflicts have led us to examine the need for individuals, institutions, and nations to behave strategically in order to achieve their goals and maintain their well-being. Global issues such as climate change, migration, resource depletion, and pollution, as well as revolts and protests against corporations, regimes, and other central authorities, are the result of increased levels of negative externalities among individuals and nations that jointly mandate policy intervention at international and global levels.

Game theory and experimental economics have become the main analytical tools for addressing strategic issues in the field of economics and have gained considerable influence in other disciplines, including political science, sociology, and law, as well as computer science and evolutionary biology. With globalization and the growing openness of our societies, and with the growing level of communication and analytical capacity, game theory and experimental economics are perceived as major tools for policy makers and not only for theory construction.

This book contains chapters by experts proposing game theoretical solutions to a variety of social issues related to global and international conflicts over natural resources and the environment. The focus of the book is on applications that have policy implications and may consequently lead to the establishment of policy dialogues. A main objective of the book is to illustrate the usefulness of game theory in policy making at multiple levels and for various aspects related to global and international issues.

The book constitutes a collection of papers that were originally presented at a conference dedicated to game theory and practice in global and international issues that took place in Riverside, California, in July 2011. The meeting in Riverside was the eighth in a series of biennial meetings on game theory and practice commencing in 1998.¹

1.2 Content of the book

The book includes 13 chapters focusing on a variety of issues related to climate change, management of common pool resources, negotiations over international or global resources, international fishery management, prevention of regional ecological damages, globalization and environmental protection, management of international water, the Arab Spring, and pollution and international trade. It is divided into two parts: (1) experimental economics applications to global and international issues, and (2) game theory and political economy applications to global and international issues. Brief descriptions of the chapters are presented below.

1.2.1 Part I: Experimental economics applications

Part I includes five chapters that are concerned with management of common pool resources and public bad under uncertainty and asymmetry of information.

Chapter 2, by Tavoni and Dannenberg, starts with the observation that efforts to protect global climate often face the challenge of coordinating national contributions and distributing costs equitably in the face of different notions that countries might have of equity and strong incentives for free-riding. Using experimental methods, the authors study the drivers of cooperation among autonomous agents who are faced with a cooperative game requiring multilateral efforts in order to reach a pre-specified threshold and thereby avoid a collective risk. Their design differs from the standard linear public good game by requesting sequential, rather than simultaneous, contributions; imposing the common objective of avoiding loss, rather than creating surplus; and introducing uncertain, rather than deterministic losses. Communication modes are also experimentally manipulated. The chapter reports that asymmetry in endowments undermined coordination, particularly when the subjects had no signaling mechanism beyond their own contributions, with 80 percent of all groups failing to reach the target sum. On the other hand, pledges significantly decreased the percentage of failure. There seems to be no evidence that “wealthy” agents, who bear more responsibility for reaching the target threshold, contribute more.

Chapter 3 by Munoz-Garcia and Espinola-Arredondo shifts the emphasis from the management of resources and communication opportunities to the management of information about the size of the initial stock of a common pool resource (CPR). This issue is studied experimentally in a two-person, two-period entry deterrence game between an incumbent player, who is perfectly informed about the size of the CPR, and an uninformed potential entrant. The initial stock of the CPR is set to be either high or low. In the complete information condition, both agents are accurately informed about the initial stock sizes, whereas, in the incomplete information condition, the incumbent is privately informed about the stock size, but the entrant only observes the incumbent’s first-period appropriation level. The results suggest important links between stock size and information. Under incomplete information and high-stock level, the incumbent over-exploits the CPR during the first period. Both agents exploit the CPR in the second period. Under incomplete information and high-stock level, the incumbent under-exploits the CPR in order to signal the presence of low stock to potential entrants. However, if the stock level is high, the incumbent also under-exploits the CPR but for a different reason, namely, to conceal its type from potential entrants and thereby deter entry. The implications of these inefficiencies to the conservation or destruction of the CPR are clearly explored.

In Chapter 4, Espinola-Arredondo and Munoz-Garcia start with the observation that negotiations of environmental agreements generally involve uncertainty because no accurate assessments may be made on whether or not other countries have the technical ability to fully comply with the terms of the treaty. Incomplete information about other countries’ ability to comply with the terms of the treaty is experimentally manipulated in a two-player, two-stage signaling game, which in the first stage – the negotiation stage of the international environmental agreement (IEA) – the leader announces its participation decision, accepting a given set of non-binding commitment levels. In the second stage, the follower chooses whether or not to participate in the IEA. Two layers of uncertainty are considered – namely, unilateral uncertainty and bilateral uncertainty. Using the calculus of game theory, the analysis shows that, relative to complete information, unilateral uncertainty may facilitate the emergence of successful treaties. However, the introduction of bilateral uncertainty may entail equilibrium outcomes in which the IEA is signed under the same conditions as in complete information. The chapter also demonstrates that, under complete information, both welfare improvements and welfare losses may be reached, depending on the type (high or low) of the negotiating parties.

Ample empirical evidence shows that, under certain circumstances, the “tragedy of the commons” may be avoidable (see the work of Elinor Ostrom and her collaborators). Group size, group homogeneity, and the type of game that appropriators play contribute to the efficiency of CPR appropriation. In Chapter 5, Zhosan and Gardner examine the potential effects of dividing the common into smaller areas on appropriation efficiency. They propose a simple model that incorporates geographic separation, rules of cooperation, and norms into a standard game of the commons setup and then analyze the conditions under which the game results in efficient equilibrium. The authors summarize the results of a previous experiment and then conclude that, under simple assumptions, enforcing geographical separation may prove to be another effective tool in successfully managing the commons.

Pevnitskaya and Ryvkin (Chapter 6) explore the joint effects of environmental context and termination uncertainty on decisions in a dynamic game with a public bad. This context is relevant for situations known for regulation of polluting agents such as CO₂ pollution by states that benefit from economic revenue (private good), but at the same time the production process creates pollution (private bad), which accumulates over time. On every period of the game, subjects are instructed to choose a production level that generates private revenue. It also generates “emissions” that accumulate over time and serve as public bad. Using the Markov perfect equilibrium solution and social optimum as two alternative benchmarks in a dynamic experimental setting, the observed individual decisions are shown to fall between these two benchmarks. An interesting result of the experiment is that subjects allocate their entire endowment to production under termination uncertainty in the last stages of the game.

1.2.2 Part II: Game theory and political economy applications

The eight chapters that comprise Part II address various global and international issues, such as pollution, climate change, social unrest, trade, and natural resources including fisheries and water.

Chapter 7 by Munro reviews the role of game theory in instigating policy decisions confronting Regional Fisheries Management Organizations (RFMOs). RFMOs were designed to manage fish stocks to be found within both the coastal state Exclusive Economic Zone (EEZ) (see also Zhosan and Gardner, Chapter 5) and the adjacent high seas. RFMOs face the “new member” problem, in which states included in the RFMOs are obligated to consider membership of states expressing a desire to be included in the RFMOs’ fishery resources after the RFMOs have been established. The chapter demonstrates the role game theory plays in developing solutions to “new member” problems, now being discussed within the Organization for Economic Co-operation and Development (OECD).

Human societies rely on indispensable ecological services that give rise to the “tragedy of the commons,” including water purification, livestock support, and climate stability. These services are provided by wetlands, forests, and oceans, to mention just a few. Chapter 8 by Laurent-Lucchetti, Leroux, and Sinclair-Desgangé is built on two observations. The first is that the provision of ecological services is subject to discontinuities (threshold effects) following the abuse of the involved ecosystems. The second and related observation is that the inherent complexity of ecosystems usually renders it difficult to assess threshold values with certainty. The authors establish that a strategic environment, in which the total resource to be divided between the agents follows a multinomial distribution, contains multiple equilibria. They focus on “cautious equilibria” in which agents collectively avoid the worst outcome, “dangerous equilibria” in which the total demand may be unsustainable, and “dreadful equilibria.” Their analysis of the equilibria gives rise to a major insight, namely, that allowing agents to cooperate and form deviating coalitions would eliminate all the “dreadful equilibria” and some of the “dangerous equilibria,” while keeping “cautious equilibria,” which are robust to such deviations.

Globalization and the resulting fierce competition over natural resources have dramatically enhanced the over-exploitation of water, land, and forests. Some of the deteriorating effects of over-exploitation have been environmental pollution, deforestation, and climate change. Another serious consequence, which is the focus of Chapter 9 by Zapata-Lillo, is the breaking of both the social bonds and the virtuous interaction between the communities and their environment. The author proposes a model of collective action in which the players are the social groups forming the communities. Players have to decide independently whether to act collectively to protect the common natural resources or stay indifferent. A payoff structure is then imposed on this game, and the equilibria of the game are constructed. The emergence of certain patterns of social organization of these communities and the role that protective stock accumulation plays in the formation of these patterns are then investigated. Analysis of the model supports the opinion that communities maintaining close contact with natural resources may be the main actors in facing environmental and natural resource catastrophes.

Governance of international water resources requires understanding of the interplay of formal and informal agreements. Cooperation in the form of formal agreements enhances the welfare of the river basin and prevents potential conflicts. However, uncertain conditions (e.g., variability in water flow) that could not be anticipated when the agreement was signed may change the initial conditions and thereby render the agreements unsustainable. Chapter 10 by Lloret models the potential welfare gains associated with informal agreements, whether or not formal agreements are in place. The model is parameterized with a bargaining power parameter and the benefit functions of the countries sharing the basin. Theoretical analysis of the parameter space shows that establishing informal agreements provides maximum gains, and subsequent empirical investigation of 39 bilateral basins estimates the mean gain at 6.5 percent.

Zhu, Houba, and Pham-Do (Chapter 11) address another problem in the management of international water. They propose a joint management approach for international water that is claimed to be efficient and stable, and apply it to the case of the Mekong River, which recently has become a hot spot in terms of unilateral activities by its riparians. The authors observe that the Mekong River Commission (MRC) that regulates the Lower Mekong region has a great potential for welfare improvements from cooperation. But the MRC faces uncertainty in reaching an agreement with China, which is at present not a signatory to the 1995 Mekong Treaty. Welfare gains would increase significantly if China is part of the agreement. The chapter describes the gains from a joint management that includes all upper and lower Mekong riparian states.

The so-called “Arab Spring” is still unfolding. Chapter 12 by Gilli proposes a new point of view on the protests, none of them peaceful, that have characterized Tunisia, Libya, Egypt, Bahrain, Yemen, and more recently Syria from December 2010 to about May 2012. The chapter proposes a simple game theoretical model to describe the relationship between the disenfranchised (the citizens) and the enfranchised (the selectorate) segments of the population. It focuses on the role of the country’s wealth and on the size of its selectorate. It is characterized by asymmetric information on the likelihood of establishing a working democratic rule through protests and revolts. The model is admittedly simplistic, but some of its implications are testable. Thus, the model implies that if the country is poor, but the regime is strong, then the autocracy will remain in power. If the country possesses intermediate wealth, then the citizens will protest and the selectorate will appease, leading to reforms. And if the country is sufficiently wealthy and the selectorate is large, then the citizens will revolt. Clearly, the model is too simple to consider all the important aspects of real events of the Arab Spring that vary from one country to another (e.g., conflicts between religious sects), but it offers a specific point of view that merits consideration.

Fujiwara and Van Long (Chapter 13) propose a model to explain possible solutions to the trade of an exhaustible resource between exporting and importing states. The chapter provides dynamic and static settings and then compares the Nash and Stackelberg equilibrium solutions under leadership by the importing or exporting country. Its findings suggest that, as compared to the static Nash equilibrium for normal form games, both countries are better off in equilibrium if the importing country is the leader, but that the follower is worse off if the exporting country is the leader. The world welfare is highest under the importing country’s leadership and lowest under the exporting country’s leadership.

Nentjes, Dijkstra, and De Vries (Chapter 14) address the objective of efficiency and equity in international environmental agreements that aim at reducing damages caused by negative externalities and common pool problems. The Nash Bargaining Solution (NBS) has been used to address such objectives, but it requires perfect information. An alternative concept, the Market Exchange Solution (MES), is proposed. The authors demonstrate how each approach performs and suggest that MES is a more suitable model than the NBS for describing and predicting allocation of effort and the distribution of payoffs resulting from international negotiations between self-interested sovereign states.

1.3 Policy messages

Not surprisingly, the policy messages are both general and chapter-specific. We start with the chapter-specific policy messages and then synthesize them.

The policy message in the chapter by Tavoni and Dannenberg, which deals with coordination and protection of the global climate, is that coordination-promoting institutions, early action, and redistribution from richer to poorer nations are essential for the avoidance of collective risk. The next chapter by Munoz-Garcia and Espinola-Arredondo, which deals with information and the tragedy of the commons, suggests that policy makers may use incentive-driven regulations such as quotas that specify significant penalties to signal users the cost of over-exploitation under various states of stock and information setting. Chapter 4 by Espinola-Arredondo and Munoz-Garcia focuses on uncertainty and environmental negotiations. It suggests that international agencies could provide incentives to either strategically distribute or conceal information in order to promote successful treaties. Zhosan and Gardner, who test the effectiveness of geographic restrictions on common pool resources, imply that, in creating the smaller geographical areas, a policy maker should always analyze the equilibrium number of appropriators in each area to allow for small manageable groups. However, creating too many areas may increase management costs, t...