Cavagnac, Michel and Cheikbossian, Guillaume (2012) Coalition Formation and Environmental Policies in International Oligopoly Markets. TSE Working Paper, n. 12-364

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Abstract

This paper analyzes the problem of international environmental cooperation as a coalition
formation game. For this purpose, we develop a simple model with three countries of unequal size. Strate-
gic interactions between those countries come from the imperfect competition among producers in global
markets and from the transboundary pollution generated by the ?rms. To capture e¢ ciency gains from
coordinating policies, countries can join a coalition and sign an international environmental agreement.
The equilibrium coalition structure then depends on the country-size asymmetry and on the marginal
environmental damage. Interestingly, we show that the grand coalition is less likely to emerge as an equi-
librium outcome once two countries form a subcoalition. Furthermore, the further enlargement of the
initial subcoalition can be blocked either by the outsider or by the insiders.