IDEAS home Printed from https://ideas.repec.org/p/sgo/wpaper/1602.html
   My bibliography  Save this paper

Economic Targets and Loss-Aversion in International Environmental Cooperation

Author

Listed:
  • Doruk Iris

    () (Department of Economics, Sogang University, Seoul)

Abstract

In the standard emission problem, each country¡¯s ruling party decides on an optimal level of emissions by analyzing the cost and benefit to the country. However, such policy decisions are often influenced by political parties¡¯ incentives to be elected. Voters tend to give higher priority to economic issues than they do to environmental ones. As a result, political parties have additional incentives to reach a critical economic benefit level, at a cost of higher emission level, in order to satisfy voters¡¯ expectations in economic issues. Therefore, this study explores the implications of political parties being averse to insufficient economic performance relative to a critical economic target level on sustaining an international environmental agreement on emission levels. In doing so, we allow countries to have asymmetric concerns about economic targets, as well as asymmetric technology levels. We find that stronger concerns about economic targets deter the most cooperative emission levels countries could jointly sustain. Furthermore, technological asymmetry could either deepen or offset this impact. These results suggest that efforts on achieving substantial international environmental agreements should be supported at the citizen level to eliminate the adverse effects.

Suggested Citation

  • Doruk Iris, 2016. "Economic Targets and Loss-Aversion in International Environmental Cooperation," Working Papers 1602, Research Institute for Market Economy, Sogang University.
  • Handle: RePEc:sgo:wpaper:1602
    as

    Download full text from publisher

    File URL: ftp://163.239.156.99/wpaper/DI_RIME_2016-02.pdf
    File Function: First version, 2016
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eric Neumayer, 2002. "Do Democracies Exhibit Stronger International Environmental Commitment? A Cross-country Analysis," Journal of Peace Research, Peace Research Institute Oslo, vol. 39(2), pages 139-164, March.
    2. Colin Camerer & Linda Babcock & George Loewenstein & Richard Thaler, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 407-441.
    3. Alberto Alesina & Francesco Passarelli, 2015. "Loss Aversion in Politics," NBER Working Papers 21077, National Bureau of Economic Research, Inc.
    4. Drew Fudenberg, 2006. "Advancing Beyond Advances in Behavioral Economics," Journal of Economic Literature, American Economic Association, vol. 44(3), pages 694-711, September.
    5. Doruk İriş & Jungmin Lee & Alessandro Tavoni, 2015. "Delegation and public pressure in a threshold public goods game: theory and experimental evidence," GRI Working Papers 186, Grantham Research Institute on Climate Change and the Environment.
    6. Geir Asheim & Bjart Holtsmark, 2009. "Renegotiation-Proof Climate Agreements with Full Participation: Conditions for Pareto-Efficiency," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(4), pages 519-533, August.
    7. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
    8. Wolfgang Buchholz & Alexander Haupt & Wolfgang Peters, 2005. "International Environmental Agreements and Strategic Voting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(1), pages 175-195, March.
    9. Jeffrey Frankel, 2011. "Over-optimism in forecasts by official budget agencies and its implications," Oxford Review of Economic Policy, Oxford University Press, vol. 27(4), pages 536-562.
    10. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    11. M. Keith Chen & Venkat Lakshminarayanan & Laurie R. Santos, 2006. "How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 517-537, June.
    12. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-894, Supplemen.
    13. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    14. Pavlova, Yulia & de Zeeuw, Aart, 2013. "Asymmetries in international environmental agreements," Environment and Development Economics, Cambridge University Press, vol. 18(01), pages 51-68, February.
    15. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    16. Ernst Fehr & Lorenz Goette, 2007. "Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment," American Economic Review, American Economic Association, vol. 97(1), pages 298-317, March.
    17. Elisabeth Gsottbauer & Jeroen den Bergh, 2013. "Bounded rationality and social interaction in negotiating a climate agreement," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 13(3), pages 225-249, September.
    18. Ferrara, Ida & Missios, Paul & Murat Yildiz, Halis, 2009. "Trading rules and the environment: Does equal treatment lead to a cleaner world?," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 206-225, September.
    19. Jason Shogren & Gregory Parkhurst & Prasenjit Banerjee, 2010. "Two Cheers and a Qualm for Behavioral Environmental Economics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 46(2), pages 235-247, June.
    20. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    21. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    22. Hadjiyiannis Costas & İriş Doruk & Tabakis Chrysostomos, 2012. "International Environmental Cooperation under Fairness and Reciprocity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-30, August.
    23. Bowman, David & Minehart, Deborah & Rabin, Matthew, 1999. "Loss aversion in a consumption-savings model," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 155-178, February.
    24. Daido, Kohei & Morita, Kimiyuki & Murooka, Takeshi & Ogawa, Hiromasa, 2013. "Task assignment under agent loss aversion," Economics Letters, Elsevier, vol. 121(1), pages 35-38.
    25. Congleton, Roger D, 1992. "Political Institutions and Pollution Control," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 412-421, August.
    26. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    27. Matthew McGinty, 2007. "International environmental agreements among asymmetric nations," Oxford Economic Papers, Oxford University Press, vol. 59(1), pages 45-62, January.
    28. Conrad, Klaus & Kohn, Robert E, 1996. "The US market for SO2 permits : Policy implications of the low price and trading volume," Energy Policy, Elsevier, vol. 24(12), pages 1051-1059, December.
    29. Simon Dietz & Carmen Marchiori & Alessandro Tavoni, 2012. "Domestic Politics and the Formation of International Environmental Agreements," Working Papers 2012.76, Fondazione Eni Enrico Mattei.
    30. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 41-71.
    31. Greene, David L., 2011. "Uncertainty, loss aversion, and markets for energy efficiency," Energy Economics, Elsevier, vol. 33(4), pages 608-616, July.
    32. E. Han Kim & Adair Morse & Luigi Zingales, 2006. "What Has Mattered to Economics Since 1970," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 189-202, Fall.
    33. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    34. Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February.
    35. Luciano Mendez & Rafael Trelles, 2000. "The Abatement Market A Proposal for Environmental Cooperation among Asymmetric Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 16(1), pages 15-30, May.
    36. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    37. Dietz, Simon & Marchiori, Carmen & Tavoni, Alessandro, 2012. "Domestic Politics and the Formation of International Environmental Agreements," Climate Change and Sustainable Development 139487, Fondazione Eni Enrico Mattei (FEEM).
    38. Ciccarone, Giuseppe & Marchetti, Enrico, 2013. "Rational expectations and loss aversion: Potential output and welfare implications," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 24-36.
    39. Michael Hoel, 1992. "International environment conventions: The case of uniform reductions of emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(2), pages 141-159, March.
    40. Carraro, Carlo & Siniscalco, Domenico, 1993. "Strategies for the international protection of the environment," Journal of Public Economics, Elsevier, vol. 52(3), pages 309-328, October.
    41. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    42. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    43. McFadden, Daniel, 1999. "Rationality for Economists?," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 73-105, December.
    44. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    45. repec:cup:apsrev:v:79:y:1985:i:02:p:293-304_22 is not listed on IDEAS
    46. Antoine Cazals & Alexandre Sauquet, 2015. "How do elections affect international cooperation? Evidence from environmental treaty participation," Public Choice, Springer, vol. 162(3), pages 263-285, March.
    47. Alexandre Mas, 2006. "Pay, Reference Points, and Police Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 783-821.
    48. Finus, Michael, 2008. "Game Theoretic Research on the Design of International Environmental Agreements: Insights, Critical Remarks, and Future Challenges," International Review of Environmental and Resource Economics, now publishers, vol. 2(1), pages 29-67, June.
    49. Justin Sydnor, 2010. "(Over)insuring Modest Risks," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 177-199, October.
    50. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
    51. Gary Charness & Matthias Sutter, 2012. "Groups Make Better Self-Interested Decisions," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 157-176, Summer.
    52. Caroline Freund & Caglar Ozden, 2008. "Trade Policy and Loss Aversion," American Economic Review, American Economic Association, vol. 98(4), pages 1675-1691, September.
    53. Kolstad Charles D, 2010. "Equity, Heterogeneity and International Environmental Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-17, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Emission Problem; Economic Targets; Loss-Aversion; International Environmental Agreements; Repeated Game.;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sgo:wpaper:1602. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jung Hur). General contact details of provider: http://edirc.repec.org/data/risogkr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.