Tipping Points and Loss Aversion in International Environmental Agreements

Abstract

We study the impact of loss-aversion and the threat of catastrophic damages, which we jointly call threshold concerns, on international environmental agreements. We aim to understand whether a threshold for dangerous climate change is as an effective coordination device for countries to overcome the global free-riding problem and abate sufficiently to avoid disaster. We focus on loss-averse countries negotiating either under the threat of either high environmental damages (loss domain), or low damages (gain domain). Under symmetry, that is when countries display identical degrees of threshold concern, we show that such beliefs have a positive effect on reducing the emission levels of both signatories to the treaty and non-signatories, leading to higher global welfare and weakly larger coalitions of signatories. We then introduce asymmetry, by allowing countries to differ in the degree of concern about the threat of disaster. We show that stable coalitions are mostly formed by the countries with higher threshold concern. When enough countries having no threshold concern could cause the coalition size to diminish, regardless of the other countries have strong or mild threshold concerns.

Climate thresholds and heterogeneous regions: Implications for coalition formation

“…Still, there exists a range of parameter values for which the problem of climate change may still be a coordination game. This problem has been further analyzed theoretically and in an experimental context in Schmidt (2017) and Iris and Tavoni (2016). In the context of a renewable resource, Miller and Nkuiya (2016) also studied the possibility of cooperation under (uncertain) thresholds showing similar ambiguous results.…”