Working Paper: NBER ID: w22240
Authors: Cuicui Chen; Richard J. Zeckhauser
Abstract: A central authority possessing tax and expenditure responsibilities can readily provide an efficient level of a public good. Absent a central authority, voluntary arrangements must replace coercive ones. Significant under-provision must be expected. International public goods are particularly challenging because of the strong asymmetries among nations. We identify a solution, the Cheap-Riding Efficient Equilibrium, that defines the relative contributions of players in differing size (or preference intensity) to reflect cheap riding incentives, yet still achieves Pareto optimality. Players start by establishing the Alliance/Nash Equilibrium as a base point. From that point they apply either the principles of the Nash Bargaining Solution or the Lindahl Equilibrium to proceed to the Pareto frontier. We apply our theory to climate change mitigation, a critical international public good. Having examined the Nordhaus Climate Club proposal, we test the Alliance/Nash Equilibrium model using individual nations' Intended Nationally Determined Contributions pledged at the Paris Climate Change Conference. As hypothesized, larger nations made much larger pledges in proportion to their Gross National Incomes.
Keywords: Collective Action; Public Goods; Climate Change; Asymmetry
JEL Codes: C72; F53; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of nations (measured by gross national income) (F40) | contributions to public goods (H40) |
| absence of a central authority for public goods (H49) | underprovision of public goods (H42) |
| nation size (F52) | contribution levels (D64) |
| larger nations (F52) | larger pledges in proportion to their gross national incomes (F53) |
| Nash equilibrium model (C72) | larger nations contribute disproportionately more (H56) |
| structure of international agreements (F53) | contributions of nations based on their relative sizes (F62) |
| cheap-riding incentives of smaller nations (F55) | insufficient contributions from smaller nations (F55) |