Coalition Formation and Environmental Policies in International Oligopoly Markets

This paper analyzes the problem of international environmental cooperation as a coalition formation game. For this purpose, we develop a simple model with three countries of unequal size. Strate- gic interactions between those countries come from the imperfect competition among producers in global markets and from the transboundary pollution generated by the ?rms. To capture e¢ ciency gains from coordinating policies, countries can join a coalition and sign an international environmental agreement. The equilibrium coalition structure then depends on the country-size asymmetry and on the marginal environmental damage. Interestingly, we show that the grand coalition is less likely to emerge as an equi- librium outcome once two countries form a subcoalition. Furthermore, the further enlargement of the initial subcoalition can be blocked either by the outsider or by the insiders.