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This paper examines green alliances between environmental groups (EGs) and polluting firms, which have become more common in the last decades, and analyzes how they affect policy design. We first show that the activities of regulators and EGs are strategic substitutes, giving rise to free-riding incentives on both agents. Nonetheless, the presence of the EG yields smaller welfare benefits when firms are subject to regulation than when they are not. In addition, the introduction of environmental policy yields large welfare gains when the EG is absent but small benefits when the EG is already present.

We consider a common pool resource (CPR) where, in the first stage, every firm chooses an equity share on its rivalsiproOts (cross-ownership) and, in the second stage, firms compete for the resource. We identify equilibrium equity shares in this setting, and compare them against the socially optimal shares that maximize welfare. Our results show that equity shares are welfare improving under certain conditions, but can lead to a socially insufficient exploitation of the CPR if shares are large enough; as in a merger where firms equally share equity. We also found that, as the number of firms exploiting the resource increases, socially excessive exploitation occurs under larger parameter combinations. We analyze common policy tools, such as quotas and emission fees, evaluating how they are a§ected by equity shares; and then compare them against a novel policy tool: optimal equity taxes.

This paper examines how positive or negative perceptions about innovation affect firms' strategic behavior when certifying their products. In particular, we consider two types of firm (innovative and noninnovative) which choose between three signals: (a) certified claim, (b) uncertified claim, and (c) no claim. The consumer, either exhibiting positive or negative perceptions, is uninformed about the firm's type and only observes the firm's claim. We find that a separating equilibrium arises in which information about the innovation is revealed to consumers. We also identify a pooling equilibrium in which both types of firm choose the same claim, concealing information from consumers. We show that regulation requiring mandatory certification can hinder information transmission. Our results also indicate that changes in product perceptions do not necessarily facilitate information transmission.

This paper examines the competition between organic and non-organic firms, their incentives to undertake a horizontal merger, and the effect of mergers on firms’ market shares. We also consider an alternative setting where one firm can acquire its rival. For generality, we allow for product differentiation, demand, and cost asymmetries. Our results show that both organic and non-organic firms, despite their cost asymmetries and demand differentials, have incentives to merge under large conditions. When demand and cost differentials are significant, we identify settings under which a firm (either organic or non-organic) purchases its rival, to subsequently shut it down, and yet increase its profits. We then study under which conditions the merger can be welfare improving, which is more likely when goods are highly differentiated and their production costs are relatively symmetric.

We study entry policies as an alternative form of environmental policy. Given the strong political opposition to standard output subsidies and taxes, several countries have recently used entry policies to promote renewable energy technology, such as solar panels and biofuels. We study a two-stage game in which two regulators choose an entry policy (i.e., tax, subsidy or permit) to maximize domestic welfare. Observing the policy, firms decide the region in which to enter and compete as Cournot oligopolists. We find that both domestic (uncoordinated) policies and internationally coordinated policies increase welfare relative to unregulated settings. However, the welfare gains from international policy coordination are only large when the product is extremely clean. These results indicate that the welfare gains of international policy coordination may only offset the costs of negotiation in relatively clean industries.

This chapter analyzes strategic interaction of firms under incomplete information. Exercise 9.1 studies entry decisions when the incumbent’s cost is unobservable to the entrant. We show that the low-cost firm can strategically increase output relative to the complete information setting, to the level that the high-cost firm cannot profitably imitate, in order to deter entry. Exercise 9.2 examines the firm’s incentives to offer damaged goods at an extra cost. We find that consumers are better off since high-value consumers can buy the undamaged version of the good at a lower price while low-value consumers can buy the damaged good who are otherwise not served. Exercise 9.3 considers firms’ incentives to invest in corporate social responsibility (CSR) when consumers do not receive accurate signal on product quality. We report that the high-quality firm can invest in CSR to signal its product differentiation from low-quality rivals, and CSR investments are usually observed in market with noisy signals such as fashionable clothes, cosmetics, and electronics to distinguish from counterfeit or inferior products. Exercise 9.4 identifies firms’ intertemporal pricing decisions when they can advertise and poach consumers from one another. We find that in a symmetric setting, every firm obtains an equal share of the market in the first period, and sells to its rival’s consumers at a price half of that selling to its own consumers in the second period.

This paper examines a model of investment in abatement where polluting firms produce output while investing in RD (2) produce output alone; or (3) engage in both activities. We evaluate how the emergence of each result is affected by the market structure in which firms compete and by the severity of spillover effects. We then measure welfare levels in each equilibrium profile. Overall, we show that firms endogenously choose to focus on R&D only when the market is concentrated and spillover effects are small. In other type of industries, our findings indicate that firms may focus on output production or engage in both activities under relatively large conditions.

We analyze a two-stage sequential-move model of location and pricing to identify firm’s location, output, and welfare. We consider two pricing regimes (mill pricing and spatial price discrimination) and, unlike previous literature, allow in each of them for a non-uniform population density, non-constant location costs (i.e., the setup costs, such rental costs and land prices, differ by firm’s location), and endogenous market boundaries. Under constant location costs, our results show the firm locates at the city center under both mill and discriminatory pricing, and that output is larger under spatial price discrimination. Welfare comparisons are, however, ambiguous. Under non-constant location costs, we find the optimal location can move away from the city center, and does not coincide across pricing regimes. Compared with mill pricing, spatial price discrimination generates a higher level of output. We also find that welfare is higher (lower) under mill than under discriminatory pricing when transportation rates are low (high, respectively).

This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only a separating equilibrium can be supported, where information about the incumbent’s costs is conveyed to the entrant, but also a pooling equilibrium, where the actions of regulator and incumbent conceal the monopolist’s type, thus deterring entry. We demonstrate that the regulator strategically designs subsidies to facilitate, or hinder, entry deterrence, depending on which outcome yields the largest social welfare. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete-information environments and standard entry-deterrence games where the regulator is absent.

We examine an entry-deterrence model in the commons. We investigate in which contexts asymmetric information among firms becomes welfare improving, and in which settings an uninformed regulator may prefer to assess and disseminate information about the available stock among firms.

We examine an entry-deterrence model with multiple incumbents who strategically increase their individual appropriation in order to prevent entry. We show that entry deterrence yields a welfare improvement, relative to contexts of unthreatened entry, if firms exploit a relatively scarce resource. When incumbents compete for an abundant commons, however, their exploitation becomes large, and welfare losses can arise. Hence, our paper suggests that policies that protect the commons from further entry are actually more necessary when the resource is abundant than when it is scarce.

This paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry. We consider complete and incomplete information settings, where potential entrants use the regulator's tax policy and the incumbent's output decisions in order to infer the incumbent's cost structure. When the regulator is absent, we show that firms' entry-deterring practices increase pollution relative to complete information. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information contexts. Our results, therefore, identify under which cases an under- or over-estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact. We also examine how this estimation error increases as firms become more symmetric in their production costs.

This paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities.

1. Global and Environmental Issues: Theoretical applications and policy implications Ariel Dinar and Amnon Rapoport 2. Coordinating to Protect the Global Climate: Inequality and communication in the experimental lab Alessandro Tavoni and Astrid Dannenberg 3. The Role of Information in the Tragedy of the Commons Felix Munoz-Garcia and Ana Espinola-Arredondo 4. Environmental Negotiations under Uncertainty: Can they improve welfare? Ana Espinola-Arredondo and Felix Munoz-Garcia 5. Enforced Geographic Separation as a Factor in Avoiding the Tragedy of the Commons Dmytro Zhosan and Roy Gardner 6. Experimental Studies of Games with a Dynamic Public Bad Svetlana Pevnitskaya and Dmitry Ryvkin 7. Regional Fisheries Management Organizations and the New Member Problem: From theory to policy Gordon R. Munro 8. Haggling on the Verge of Disaster Jeremy Laurent-Lucchetti, Justin Leroux and Bernard Sinclair-Desgagne 9. The Dynamics of Collective Actions that Protect the Environment against the Worst Effects of Globalization Paloma Zapata-Lillo 10. Informal Agreements in Transboundary Water Resources Antonio Lloret 11. Efficient Use of the Mekong River Basin: A joint management approach Xueqin Zhu, Harold Houba and Kim Hang Pham-Do 12. Models of Repression and Revolt in Autocracies: A specific point of view on the Arab Spring Mario Gilli 13. Optimal Tariffs on Exhaustible Resources: The case of quantity-setting Kenji Fujiwara and Ngo Van Long 14. A Market-Based Design for International Environmental Agreements Andries Nentjes, Bouwe R. Dijkstra and Frans P. De Vries

This paper investigates how the introduction of social preferences affects players’ equilibrium behavior in both one-shot and infinitely repeated versions of the Prisoner’s Dilemma game. We first show that defection survives as the unique equilibrium of the stage game if at least one player is not too concerned about inequity aversion. Second, we demonstrate that in the infinitely repeated version of the game, fairness concerns operate as a “substitute: for time discounting, as fairness helps sustain cooperation for lower discount factors. We then extend our results to more general simultaneous-move games, and more general preferences. Furthermore, we examine how the introduction of incomplete information about players’ social preferences can help in the selection of the efficient cooperative outcome. Finally, we point out the implications of our findings for the design and analysis of experiments involving repeated games. In particular, repeated game equilibria which are thought to be supported by sufficiently large discount factors, may in fact be sustained by a combination of discounting and social preference parameters, an observation that may help rationalize recent experimental findings.

This paper examines countries’ free-riding incentives in international environmental agreements (IEAs) when, first, the treaty is non-enforceable, and, second, countries do not have complete information about other countries’ non-compliance cost. We analyze a signaling model whereby the country leading the negotiations of the international agreement can reveal its own non-compliance costs through the commitment level it signs in the IEA. Our results show that countries’ probability of joining the IEA is increasing in the free-riding benefits they can obtain from other countries’ compliance, and decreasing in the cost of not complying with the initial terms of the agreement. This paper shows that, when free-riding incentives are strong enough, there is no equilibrium in which all countries join the IEA. Despite not joining the IEA, however, countries invest in clean technologies. Finally, we relate our results with some common observations in international negotiations.

This paper examines the two externalities that a country's environmental regulation imposes on other country's welfare: an environmental externality, due to transboundary pollution, and, a competitive advantage externality, as regulations affect domestic firms' abatement costs, which impact the profits of their foreign competitors. We first analyze the emission standards that countries independently set under different market structures and then compare them with the standards set under international environmental agreements that internalize one or both types of externalities. The paper hence disentangles the effect of each externality. We show that firms' profits increase when countries participate in international treaties if the environmental damage from pollution is relatively low and such pollution is not significantly transboundary. We hence demonstrate that international environmental agreements can serve as cooperative devices firms use to ameliorate overproduction and increase profits, without the need to form collusive agreements.

Recent experimental evidence supports the influence of a player's unchosen alternatives on other agent's actions. This paper examines a tractable theoretical model of reference-dependent preferences in which individuals compare other players' chosen action with respect to their unchosen alternatives. We analyze the equilibrium prediction in complete information sequential-move games, and compare it with that of standard games where players are not concerned about unchosen alternatives. We show that, without relying on interpersonal payoff comparisons (i.e., with strictly individualistic preferences), our model predicts higher cooperation among the players than standard game-theoretic models. In addition, our framework embodies different models from the literature on social status acquisition and intentions-based reciprocity as special cases. Finally, we confirm our results in three economic applications: the ultimatum bargaining game, the labor market gift exchange game, and the sequential public good game.