International Environmental Agreements with Endogenous or Exogenous Risk

Fuhai Hong and Larry Karp

Journal of the Association of Environmental and Resource Economists, 2014, vol. 1, issue 3, 365 - 394

Abstract: We examine the effect of endogenous and exogenous risk on the equilibrium (expected) membership of an International Environmental Agreement when countries are risk averse. Endogenous risk arises when countries use mixed rather than pure strategies at the participation game, and exogenous risk arises from the inherent uncertainty about the costs and benefits of increased abatement. Under endogenous risk, an increase in risk aversion increases expected participation. Under exogenous risk and pure strategies, increased risk aversion weakly decreases equilibrium participation if and only if the variance of income decreases with abatement.

Date: 2014
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Working Paper: International Environmental Agreements with Endogenous or Exogenous Risk (2013)
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