Asymmetry, optimal transfers and international environmental agreements
Working Paper 66
This paper applies optimal sharing rules to a coalition formation game with positive externalities, demonstrating the effectiveness of well-designed transfer schemes in improving outcomes for participation in International Environmental Agreements.
A numerical exercise is conducted, providing explicit proof of the failure of the conventional transfer schemes (Shapley value, Nash bargaining solution, Chander Tulkens transfer scheme) to meet the existence, robustness and optimality conditions set by the optimal sharing rule literature.
The core result is derived from a systematic analysis of the effect that the degree of full, mean-preserving asymmetry on the formation of stable self-enforcing coalitions, under two different conditions: transfers and no transfers. The effectiveness of and participation in International Environmental Agreements is found to increase with the degree of asymmetry, under the optimal sharing rule.