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Loss aversion in international environmental agreements

İriş, Doruk and Tavoni, Alessandro (2018) Loss aversion in international environmental agreements. International Review of Environmental and Resource Economics, 27 (2). pp. 363-397. ISSN 1932-1473 (In Press)

[img] Text (Loss-Aversion in IEA_Revised) - Accepted Version
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Identification Number: 10.15266/KEREA.2018.27.2.363

Abstract

We study the impact of loss-aversion and the threat of critical damages from insufficient pollutant abatement, which we jointly call threshold concerns, on the outcome of international environmental agreements. We aim to understand whether concerns for a critical level of damages induce cooperation among countries faced with the well-known free-riding problem, and yield sufficient emission reductions to avoid exceeding the threshold. Specifically, we focus on loss-averse countries negotiating under the threat of either high or low environmental damages. Under symmetry, 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 weakly larger coalitions of signatories than in the absence of reference dependence. We then introduce asymmetry, by allowing countries to differ in the degree of concern about the damages. We show that stable coalitions are mostly formed by the countries with higher threshold concerns. When enough countries exhibit standard preferences, the coalition size may diminish, regardless of the degree of concern by the others.

Item Type: Article
Additional Information: © 2018 The Authors
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
Date Deposited: 16 Mar 2019 00:11
Last Modified: 04 Apr 2019 14:06
URI: http://eprints.lse.ac.uk/id/eprint/100259

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