The Logic of Bargaining Game

For two districts or countries that try to internalize externalities, I analyze a bargaining game under private information. I derive conditions for when it is efficient with uniform policies across regions—with and without side payments—and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to better reflect local conditions, they create conflicts between the regions and, thus, delay. The results also describe when political centralization outperforms decentralized cooperation, and they provide a theoretical foundation for the controversial “uniformity assumption” traditionally used by the fiscal federalism literature. (JEL C78, D72, D82, H77)

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MITIGATION COST AND CLIMATE DAMAGE VERSUS INCENTIVE SHIFTS OF CLIMATE COALITION

Climate Change Economics ◽

10.1142/s2010007816500111 ◽

2016 ◽

Vol 07 (04) ◽

pp. 1650011

Author(s):

ZILI YANG

Keyword(s):

Climate Change ◽

Bargaining Game ◽

Integrated Assessment Model ◽

Assessment Model ◽

Policy Implications ◽

Good Representation ◽

Ghg Mitigation ◽

Mitigation Cost ◽

The Core ◽

Cooperative Bargaining

Climate damage and greenhouse gas (GHG) mitigation cost plays important roles in a region’s willingness and incentives to join the global climate coalition. Negotiation of climate treaty can be modeled as a cooperative bargaining game of externality provision. The core of this game is a good representation of incentives of the participants. In this paper, we examine the relationship between the shocks of mitigation cost/climate damage and the shifts of the core of cooperative bargaining game of climate negotiation within the framework of RICE [Nordhaus and Yang, 1996. A regional dynamic general equilibrium model of alternative climate change strategies. American Economic Review, 86, 741–765], a widely used integrated assessment model (IAM) of climate change. Constructing a method that maps the core allocations onto a convex hull on the simplex of social welfare weights, we describe the scope of the core in simple metrics and capture the shifts of the core representation on the simplex in response to the shocks of mitigation cost and climate damage. A series of simulations are conducted in RICE to demonstrate the usefulness of the approach explored here. In addition, policy implications of methodological results are indicated.

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