Tipping Points and Loss Aversion in International Environmental Agreements

32 Pages Posted: 22 Mar 2016

See all articles by Doruk İriş

Doruk İriş

Sogang University

Alessandro Tavoni

University of Bologna; London School of Economics & Political Science (LSE)

Date Written: March 21, 2016

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.

Keywords: Catastrophic Climate Change, Threshold, Loss-Aversion, International Environmental Agreements, Coalition Formation Game

JEL Classification: D0, D03, Q5, Q50, Q58

Suggested Citation

İriş, Doruk and Tavoni, Alessandro, Tipping Points and Loss Aversion in International Environmental Agreements (March 21, 2016). FEEM Working Paper No. 25.2016, Available at SSRN: https://ssrn.com/abstract=2752347 or http://dx.doi.org/10.2139/ssrn.2752347

Doruk İriş

Sogang University

Seoul 121-742
Korea, Republic of (South Korea)

Alessandro Tavoni (Contact Author)

University of Bologna ( email )

Bologna
Italy
0512098485 (Phone)
40100 (Fax)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www2.lse.ac.uk/GranthamInstitute/whosWho/Staff/AlessandroTavoni.aspx

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