Differential Game Approach for International Environmental Agreements with Social Externalities

Abstract

In this work we study an $N$-player differential game, in which a positive Social Externality affects the pay-offs of the players when they make an agreement. We divide the $N$ players in two homogeneous groups, $N_{1}$ developed countries and $N_{2}$ developing countries. For the latter, we consider a damage-cost function that evolves in time. From a normative point of view, we imagine the externality as the possibility that bilateral or multilateral agreements of various nature are by-products of an International Environmental Agreement (IEA). After the determination of solutions, we use the externality to investigate whether it is possible to have a self-enforcing agreement on pollution emissions in the short run.

Keywords: Differential Games, self-enforcing agreements, Social Externalities, asymmetric players

JEL Classification: C72, C73