Endogenous Timing in Pollution Control: Stackelberg versus Cournot-Nash Equilibria

Abstract

In the framework of international cooperation on climate change to control greenhouse gas emissions (GHG), this paper aims to shed new light on the eventuality of the emergence of a country (or a group of countries) behaving as a leader in the implementation of its environmental policy. The sequence of moves in the existing literature is usually an exogenous assumption, – known as the Cournot assumption (if countries take action simultaneously) and the Stackelberg assumption (if they act sequentially, the latter observing the strategy of the former). The main purpose here is to make the timing endogenous. To do so, we introduce a pre-play stage in the basic two-country game. Then we provide different sets of minimal conditions – on the benefit and damage functions linked to GHG emissions into the atmosphere, yielding respectively the simultaneous and the two sequential modes of play. While the results essentially confirm the prevalence of the former, they also indicate that the latter are natural under some robust conditions: a leader can emerge endogenously when implementing its environmental policy. Finally we provide sufficient conditions for a specific leader to appear. All the results come with an analysis in terms of global emissions and global welfare. No extraneous assumptions such as concavity, existence, or uniqueness of equilibria are needed, and the analysis makes crucial use of the basic results from the theory of supermodular games.