Leadership and Free-Riding: Decomposing and Explaining the Paradox of Cooperation in International Environmental Agreements

This paper decomposes the canonical model of International Environmental Agreements (Barrett in Oxf Econ Pap 46:878–894, 1994) into three effects: externality, cost-effectiveness and timing. The externality and timing effects are countervailing forces on abatement levels of greenhouse gases. The Paradox of Cooperation in the three-stage Stackelberg game is explained by showing that when the gains to cooperation are small the timing effect dominates the externality effect and large coalitions are stable. The timing effect has the greatest impact when the high benefit nations have low abatement cost. The cost-effectiveness effect arises from asymmetry and generates the need for an agreement with transfers. The cost-effectiveness effect is largest when the high benefit nations are high cost. This creates a larger difference in the marginal abatement cost of the last unit of abatement in the absence of an agreement. Numerical examples illustrate how the parameters and effects interact to result in outcomes ranging from no to full participation.