International Environmental Agreements with Uncertainty, Learning and Risk Aversion

32 Pages Posted: 11 Feb 2014

See all articles by Michael Finus

Michael Finus

University of Stirling

Pedro Pintassilgo

University of Algarve

Alistair Ulph

University of Manchester - Faculty of Humanities

Date Written: January 31, 2014

Abstract

This paper analyses the formation of international environmental agreements (IEAs) under uncertainty, focusing on the role of learning and risk aversion. It bridges two strands of literature: one focused on the role learning for the success of IEA formation when countries are risk neutral and another that explores the implications of uncertainty and risk aversion on IEA formation under no learning. Combining learning and risk aversion seems appropriate as the uncertainties surrounding many international environmental problems are still large, those uncertainties are often highly correlated as for instance in climate change and hence pooling risks may be limited, but those uncertainties are gradually reduced over time through learning. It is shown that the negative conclusion with respect to the role of learning derived for risk neutrality has to be qualified: below a threshold level of risk aversion learning can impact positively on the success of IEAs, above the threshold the opposite is true. Moreover, in a world without full learning (i.e. partial and no learning), risk aversion can lead to better outcomes, but only if risk aversion is sufficiently high.

Keywords: international environmental agreements, uncertainty, learning and risk aversion, game theory

JEL Classification: C720, D620, D800, Q540

Suggested Citation

Finus, Michael and Pintassilgo, Pedro and Ulph, Alistair M., International Environmental Agreements with Uncertainty, Learning and Risk Aversion (January 31, 2014). CESifo Working Paper Series No. 4589. Available at SSRN: https://ssrn.com/abstract=2393890

Michael Finus

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Pedro Pintassilgo

University of Algarve ( email )

8000-117 Faro
Portugal

Alistair M. Ulph (Contact Author)

University of Manchester - Faculty of Humanities ( email )

Manchester, M13 9PL
United Kingdom

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