Revista Argentina de Clínica Psicológica 2020, Vol. XXIX, N°1, 423-434
DOI: 10.24205/03276716.2020.58 423
B
EHAVIORAL
P
SYCHOLOGY
A
NALYSIS OF
I
NDIVIDUAL
D
ECISION
,
S
TRATEGIC
I
NTERACTION AND
C
LIMATE
G
OVERNANCE
Junlong Chen
1, Jiali Liu
2,3*, Yajie Wang
4, Peizi Li
5Abstract
Considering the limitations of standard economics in the research of climate governance, this paper employs the behavioral economics theory and behavioral psychology to explain the individual decision in the climate governance and the strategic interaction between countries. Firstly, realistic framework of behavioral economics was constructed, which covers psychological factors like quasi-hyperbolic discounting, value function, loss aversion, fairness, and reciprocity. The established framework was then compared with the standard economic model. The main results are as follows: on individual decision, the bounded rationality is limited by the inconsistency between loss aversion and time preference, adding to the difficulty of emission reduction; on strategic interaction, fairness is the key to international climate negotiation; the negotiating parties should set fair rules on emission reduction and restrain the excessive self-interested behaviors of
developed countries; the prisoner’s dilemma in international climate negotiation can be solved through
cooperation and reciprocity between low self-interested parties; an effective communication mechanism is essential to the success of global climate governance.
Key words: Climate Governance, Behavioral Economics, Individual Decision, Strategic
Interaction, Prisoner’s Dilemma.
Received: 16-05-19 | Accepted: 20-08-19
INTRODUCTION
The excessive exploitation of energy has accelerated the pace of climate change, exerting an enormous impact on the society and economy, and made the protection of ecological environment a global concern. On October 8, 2018, the Intergovernmental Panel on Climate Change (IPCC) mentioned in a special report that the global temperature is expected to rise by 1.5 °C between 2030 and 2052 if climate change continues at the current rate. Against this backdrop, it is imperative to enhance the
1School of Economics, Northeastern University at
Qinhuangdao, Qinhuangdao 066004, China. 2Center for
China Public Sector Economy Research of KRI, Jilin University, Changchun 130000, China. 3School of Economics, Jilin
University, Changchun 130000, China. 4School of Economics,
Northeastern University at Qinhuangdao, Qinhuangdao 066004, China. 5School of Public Affairs, Xiamen University,
Xiamen 361005, Fujian, China. E-Mail: [email protected]
backdrop, it is imperative to enhance the governance over climate change. However, the climate governance is still severely lacking on the global scale, although individual governments have taken various mitigation measures. After all, the international climate negotiation is a complex game between countries with varied interests and conflicts, many of whom are reluctant to implement emission reduction at the cost of economic growth. It is difficult for them to reach a consensus and take a concerted action worldwide.
Effective climate governance requires extensive and in-depth cooperation between countries. In fact, the game of international climate negotiation belongs to climate change economics, a new hotspot of economic research. In 2018, the Nobel Prize in Economics was awarded to William Nordhaus (Nordhaus, 1991), marking the full recognition of climate change economics in mainstream academia. Over the
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years, various theoretical models have been built to disclose the economic impact of climate change and guide the design of climate governance policies (Nordhaus, 1991; Fankhauser, 1995; Stern, 2007). For instance, Wood, (2011) attribute the failure of international cooperation in climate governance to the free-rider problem in climate negotiation. To overcome the failure, some scholars (Ostrom, 2010; Heitzig, Lessmann, & Zou, 2011; Mason, Polasky, & Tarui, 1998) respectively design climate negotiation game models from the angles of penalty, compensation, regional cooperation, multi-center game, etc. In the game method adopted, non-cooperative games, dynamic sequential games, and extended games are widely used and expanded (Peck & Teisberg, 1998; Ciscar, 2012; Forgó, Fülöp, & Prill, 2005). All the above models assume that humans are self-interested, know what they want and make rational choices to maximize their utility. Nevertheless, the human behavior in climate governance often goes against these assumptions. The traditional economic models
on climate change often overlook human’s
psychological adaptation to changes in their living conditions. With strict assumptions on rationality, the traditional models may lead to abnormalities if directly applied to analyze human behaviors.
Compared with the traditional economics, the behavioral economics uses sociology and psychology to explain most of the irrationalities in human behavioral decisions, thus reshaping the understanding of economic phenomena. Many scholars have applied behavioral economics to describe the behaviors of economic entities realistically, and set new decision-making rules for solving global climate change problems. For example, Gowdy (2008), Brekke and Johansson-Stenman (2008) (Gowdy, 2008; Brekke & Johansson-Stenman, 2008) explore climate change issues from the perspective of behavioral economics and established a framework for behavioral climate change research. Croson & Treich, (2014) ascribe the bounded rationality of economic entities to the complexity of environmental problems. Smead, Sandler, Forber et al. (2014) introduce learning dynamics to build a bargaining game model and relied on the model to study the failure of past climate negotiations, concluding that the number of negotiation parties is positively correlated with the difficulty in
achieving positive outcomes, the expected loss
induced by participants’ failure, and the chance
of successful negotiation. Aronsson and SchöB, (2018) advise pure welfare government to consider the micro-factor of individual psychological adaptation before internalizing the intertemporal externalities produced from emission reduction policies. Uehleke and Sturm, (2017) note the positive effect of collective action on stimulating environmental protection demand in the hypothetical scenario. With the aid of behavioral and experimental economics, Hasson, Löfgren, & Visser, (2010) explore the potential tradeoff between countries, mitigation investments and adaptation, and analyzed the important role of trust in enhancing cooperation. Kesternich, Reif, & Rübbelke, (2017). probe into the recent trends in behavioral environmental economics. After repeated experiments, Mielke and Steudle, (2018) prove that the Pareto optimal state can be achieved through reliable climate policies or climate investment incentives.
In light of the above, this paper employs the behavioral economics theory to explain the individual decision in the climate governance and the strategic interaction between countries. Based on the traditional economic model, a realistic framework of behavioral economics was constructed to cover such psychological factors as quasi-hyperbolic discounting, value function, loss aversion, fairness, and reciprocity, and compared with the scenario under standard economics. Both individual decision and individual interaction of international climate governance are taken into account, such that the research framework for climate governance is comprehensive enough to solve general problems rather than specific problems.
The remainder of this paper is organized as follows. Section 2 creates a model for individual decision of emission reduction under standard economics, introduces the basic concept of behavioral economics and examine the changes in the individual decision. Section 3 explains several behavioral factors, namely, loss aversion, fairness and reciprocity, and discusses the strategic interaction in light of behavioral economics. Section 4 sums up the benefits of behavioral economics-guided policies on international climate negotiation.
BEHAVIORAL PSYCHOLOGY ANALYSIS OF INDIVIDUAL DECISION, STRATEGIC INTERACTION AND CLIMATE GOVERNANCE 425
BEHAVIORAL ECONOMICS AND INDIVIDUAL DECISION OF CLIMATE GOVERNANCE
Individual decision under standard economics In standard economics, humans are assumed as fully informed, rational entities. Most studies on individual decision adopt a three-step approach: setting up a reasonable utility function; finding a proper time discount factor; discounting the utility of the offspring to the current period. Thus, the utility functions and time discount factors are unsurprisingly diverse. For instance, Nordhaus, (1991) create a separable social welfare function, and made the following statements on time discount factor: this factor is positive, rather than close-to-zero, for humans; the value of this factor is negatively correlated with the lasting effect and uncertainty of the damages to climate change. The most popular economic evaluation models for climate change include the utilitarianism function, the Bernoulli-Nash function and the Bergson-Samuelson social welfare function. However, none of them can describe the social welfare impacts of certain factors in specific functional forms. In this paper, the following hypotheses are presented under standard economics:
Hypothesis 1: The utility function of a country set to make a decision on emission reduction can
be expressed as 𝑈(𝑥) = 𝑈1(𝑥) +
∑𝑛𝑡=1𝐷(𝑡)𝑈2(𝑥), where x is greenhouse gas (GHG)
emission, 𝑈1(𝑥) is the current economic utility
of x, and 𝑈2(𝑥) is the long-term economic
utility of x for future generations. The economic impact of x is assumed as positive in the short term and negative in the long run, that is,
𝑑𝑈1(𝑥)
𝑑𝑥 > 0 and 𝑑𝑈2(𝑥)
𝑑𝑥 < 0. In addition, it is
assumed that the utility function 𝑈(𝑥) under GHG emission is inverted u-shaped as the environmental Kuznets curve on the relationship between per-capita income and environmental degradation (Panayotou, 1997). When the GHG emission is on a low level, the economy tends to grow fast; when the emission is on a high level, the growth in carbon emission will bring positive marginal utility to social economy, while the environmental degradation will bring negative marginal utility to individuals. The optimal emission under standard economics is shown in Figure 1 below.
Hypothesis 2: Under the standard economics, the discount function 𝐷(𝑡) takes an exponential form 𝐷(𝑡) = 𝛿𝑡= 1
(1+𝑟)𝑡 , which
assumes that the individual has a fixed time preference rate and stable instantaneous utility function. Besides, the benefit period for future generations can be denoted as n. Then, we have:
1 2
1
1 2
( ) ( )
( )
( )
( ) 1 (1/ 1 ) ( )
n
t n
dU x dU x
dU x
D t
dx dx dx
dU x r dU x
dx r dx
=
= +
− +
= +
(1)Since individuals are more likely to decide on GHG emission reduction facing a high positive marginal utility of such a reduction, the optimal GHG emission 𝑥∗ in the country must satisfy
𝑑𝑈(𝑥) 𝑑𝑥 |𝑥 = 𝑥
∗= 0. If the current emission is
excessive, i.e. 𝑥 (𝑥 > 𝑥∗), then the emission
should be reduced by 𝑥 − 𝑥∗.
Figure 1
.
Optimal emission under standard
economics
Introduction to behavioral economics Behavioral economics fundamentally subverts the research paradigm of standard economics, stating that humans are incompletely informed and bounded in rationality, willpower and self-interest. In other words, humans are assumed to prefer the current status, avert losses, and so on. In this paper, a value function and a quasi-hyperbolic discount function are introduced to modify the standard economic model under the following hypotheses:
Hypothesis 3: Individual preferences are influenced by reference points and loss aversion. In real life, there is a loss aversion effect among economic actors, that is, the loss of
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426
psychological utility caused by losses is greater than the return of psychological utility caused by returns of same amount. Besides, the greater the income utility, the longer it takes to acquire the income, and the greater the psychological gap. Large energy consumers like the US will face high political and economic risks in the short term, due to GHG emission reduction, and need a long period of time to acquire the income. In this case, policymakers become loss-averse and may take the following behaviors: playing down the impact of climate change, refusing to assume more reduction responsibility and even defaulting on the existing reduction commitments. Inspired by the existing studies (Kahneman & Tversky, 1979; Bowman, Minehart, & Rabin, 1999; Kőszegi & Rabin, 2006), this paper sets up the utility function for contemporary economic actors as 𝑈1(𝑥|𝑥) = 𝜃𝑈1(𝑥) + (1 −
𝜃)𝑉1(𝛥𝑥), where 0 ≤ 𝜃 ≤ 1 is the weight and
−
−
=
0
,
)
(
0
,
)
(
)
(
1x
x
x
x
x
V
(𝜆 > 1 is the loss aversion coefficient; 0<α;
β<1). If 𝛥𝑥 < 0 , then the GHG emission reduction is a loss to the present generation. Thus, 𝑈1 can be expressed as 𝑈1(𝑥|𝑥) =
𝜃𝑈1(𝑥) + (1 − 𝜃)(−𝜆(−𝛥𝑥)𝛽).
Hypothesis 4: Concerning the utility of future generations, the behavioral psychological factors are mainly reflected as the dynamic inconsistency of discount. Hence, the discount is described by a quasi-hyperbolic function here (Phelps & Pollak, 1968), which, contrary to the exponential function, assumes that humans are more concerned about the immediate future than the distant future. The function can be written as
= =
0 ,
0 , 1 ) (
*
t t t
D
t
,
where, 0 < 𝛽 ≤ 1, 𝛿 = 1
1+𝑟, 𝑟 is the fixed time
preference rate, i.e. the discount factor of individual future utility. Thus, the total utility 𝑈(𝑥|𝑥) can be expressed as:
1 2
1
1 2
1
( | ) ( | ) ( ) ( )
( ) (1 )( ( ) ) ( ) ( )
n
t
n
t
U x x U x x D t U x
U x x D t U x
=
=
= +
= + − − − +
(2)
The marginal utility at one unit increase or decrease of GHG emission can be described as:
1 2
( )
( / ) ( )
(1 )
( ) (1 (1/ 1 ) )n
dU x
dU x x d x
dx dx dx
dU x r
r dx
−
= − −
− +
+
(3)
The properties of the value function shows that, the emission reduction at 𝑥 leads to
|𝑑𝑈1(𝑥/𝑥)
𝑑𝑥 | = |𝜃 𝑑𝑈1(𝑥)
𝑑𝑥 − 𝜆(1 − 𝜃) 𝑑(−𝛥𝑥)𝛽
𝑑𝑥 | >
|𝑑𝑈1(𝑥)
𝑑𝑥 |. Since 𝜃, 𝛽 and 𝛾 are all
smaller-than-1 constants, we have 𝛾𝛽(1−(1/1+𝑟)𝑟 𝑛)<
1−(1/1+𝑟)𝑛
𝑟 . Furthermore, it can be obtained that,
in the interval of [𝑚𝑖𝑛( 𝑥∗, 𝑥∗∗), 𝑥], |𝑑𝑈(𝑥/𝑥) 𝑑𝑥 | <
|𝑑𝑈(𝑥)
𝑑𝑥 |, where 𝑑𝑈(𝑥/𝑥)
𝑑𝑥 |𝑥=𝑥∗ > 0. In this case, the
optimal emission 𝑥∗∗> 𝑥∗ means that it is
more difficult to decide on emission reduction in the context of behavioral economics. This partially explains why some countries are unwilling to implement emission reduction, although they are aware of the long-term benefits. The optimal emission under behavioral economics is shown in Figure 2 below.
Figure 2
.
Optimal emission under behavioral
economics
BEHAVIORAL PSYCHOLOGY ANALYSIS OF INDIVIDUAL DECISION, STRATEGIC INTERACTION AND CLIMATE GOVERNANCE 427
BEHAVIORAL ECONOMICS AND STRATEGIC INTERACTION OF CLIMATE GOVERNANCE
Ultimatum, fairness and international climate negotiation
International climate negotiation involves both rational factors like individual interest and
irrational factors like others’ interest, inter -generational interest, international environment, morality and ethics. This makes fairness an indispensable element in international climate negotiation. However, it is difficult to reason out a fair standard that satisfies everyone through strict logic under standard economics, because of the close correlation between fairness and subjective psychology.
Many experimental studies have shown that fairness, i.e. how fair a human behavior is, affects behavioral preferences. Humans often prefer information that is good for them. This preference is known as the self-serving bias. In international climate negotiation, the arguments about fairness are often self-serving (Lange, Vogt, & Ziegler, 2010; Güth, & Schmittberger, & Schwarze, 1982). Therefore, the countries will bargain with each other endlessly, if the responsibility for global GHG emission reduction is perceived as unfair. For example, the developing countries believe that the developed countries, which entered the industrial revolution earlier, should assume most of the responsibility for global warming. After all, these countries are outnumbered by developed countries in energy consumption, total GHG emission, and per-capita GHG emission. The developing countries also expect technical and financial supports to emission reduction from the developed countries, such as resource sharing and guidance on technical improvement. The United Nations Framework Convention on Climate Change clearly states that developed countries need to provide technical support and financial assistance to developing countries in terms of energy conservation and emission reduction, which raises moral issues to legal responsibility. The SDGs clearly stated that developed countries need to fulfill their commitments under the UN Framework Convention on Climate Change to help other countries to carry out mitigation actions, improve compliance, promote the operation of the Green Climate Fund, and help them carry out effective planning related to climate change and
management. However, some developed countries refuse to perform their legal obligations because they fear damage to their own interests that making the implementation of the Convention difficult. Correspondingly, developed countries believe that developing countries, as part of the global market, should limit their total emissions in accordance with emission standards in recent years. And the responsibility for global climate change needs to be shared by both developed and developing countries. However, some developed countries refuse to provide these supports, in fear of hurting their own interests. In addition, they call for the developing countries, as part of the global market, to limit their total emission according to the latest standards, and share with them the responsibility for global climate change.
In the course of bargaining, human preferences depend not only on interest, but also on psychological factors like fairness and trust. A typical example of fairness is the ultimatum game. An experimental study (Güth, Schmittberger, & Schwarze, 1982) finds that in a game consisting of a proposer and a responder, if the plan assignor cannot provide enough total revenue share (40% or 50%) assigned to the other party, then the respondent would rather not receive the distribution plan of the plan proposer. This is the ultimatum model. The results of the ultimatum model cannot be explained by the traditional game theory under standard economics, because even a 1% share is better than nothing as a rational person. It is evident that in the process of bargaining,
people’s preferences not only depend on the
currency, but also psychological phenomena such as fairness and trust which also play an important role. A surprising study shows individuals tend to be catastrophe accepting and not catastrophe averse, maybe because that it is the fairest when no one or everyone is a victim [Error! Reference source not found.]. In international climate negotiation, once a party feels that it has been treated unfairly, it will reject the plan proposed by the other party. Then, neither party will enjoy the benefits of emission reduction.
Kahneman, Knetsch, & Thaler, (1986) point out that reference transactions are an important factor affecting fairness. From the point of reference trading, the measurement of fairness standards is often based on a social norm rather
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than objective fairness. The fairness standard is often based on social norms rather than objective values. It varies from time to time, and from place to place. Any deviation from the standard benchmark will be deemed as unfair. During climate negotiation, developed countries are more inclined to take objective justice as the benchmark for fairness than corrective or distributive justice. The latter requires high carbon-emitting and high GDP countries like the US to compensate the victims of climate change and make special contributions to countermeasures of climate change.
From the perspective of behavioral economics, human bargaining is greatly affected by country differences and cultural factors. Experimental results show that countries differ in ultimatum bargaining, as people from different cultures have varied ideas about fairness, sharing, bidding and rejection behavior (Henrich, Boyd, & Bowles et al., 2005; Lange & Schwirplies, 2017). Besides, the citizens in different negotiating country have their respective perception of emission reduction rules, climate policy and trust (Roth, Prasnikar, & Okuno-Fujiwara, 1991). Self-interested behaviors are present in some countries, and can be explained by traditional game theory. Nonetheless, there are also lots of behaviors reflecting distributive justice. What is worse, the negotiating countries also vary in values and ideologies, making it harder from them to agree on emission reduction.
The human response to unfairness depends on why the other party behaves unfairly. The unfair behavior is acceptable if it is rational, and unacceptable if otherwise. Kahneman, Knetsch, & Thaler, (1986) show that if price increases are due to competitive pressures, consumers tend to accept it, and if it rises because of demand, it is considered unfair. In other words, whether the self-interested behavior can find a reasonable reason for itself is directly related to the other
party’s understanding of fairness. Frey & Meier, (2004) prove that a person is willing to make a greater contribution if others are informed of the contribution. To govern global climate, all countries, especially the huge carbon emitters, are faced with the huge challenge to reduce the GHG emission in production and consumption. It is insensible for a country to persuade the other party to accept the emission reduction plan, if that party simply will not approve that plan. For developing countries, the emission reduction
rules ignore the fact that developed countries emitted far more GHG in history, and that developing countries should assume less reduction responsibility due to the need for infrastructure development. By contrast, developed countries often believe that they have already made enough reduction commitments and provided sufficient financial and technical supports to developing countries, and that global climate cooperation is still a possibility, albeit the backward technology in developing countries and the inefficient allocation of emission rights by population.
Of course, the negotiating parties are willing to compromise and reach an effective agreement on a solid ethical basis. For example, the sense of fairness in climate negotiation can be greatly improved through the design of Green Climate Fund by the Transitional Committee, which mainly consists of developing countries (Pittel & Dirk, 2013). After shifting from strategic preferences to environmental preferences, a country will no longer view a small share of emission reduction as fair.
Prisoner’s dilemma, reciprocity and
international climate negotiation
According to the traditional game theory, the participants of the public welfare game only consider the individual interests. The benefits of cooperation cannot cover the cost of cooperation, indicating that cooperation can only bring about a double loss. Thus, individual rationality cannot form collective rational
action, leading to the prisoner’s dilemma. In a
certain sense, climate governance is a public good. Every country wishes to minimize its emission reduction tasks, due to lack of collective action incentives, high cost of climate governance, multiple reduction parties, and different national conditions. In addition, a country can enjoy the same reduction effects as other countries without suffering too much economic loss, even at the minimal inputs. As a result, the negotiating parties only pursue their own interests in climate negotiation, creating
the prisoner’s dilemma for collective action.
Below is a mathematical description of this dilemma.
It is assumed that two countries, country 1 and country 2, are engaging in a negotiation over climate governance, and the cost of climate governance in each country is C. When both choose cooperation, the net profit of the two
BEHAVIORAL PSYCHOLOGY ANALYSIS OF INDIVIDUAL DECISION, STRATEGIC INTERACTION AND CLIMATE GOVERNANCE 429
countries can be denoted as R-C. When only one country chooses cooperation, the net profits of the cooperating country and the non-cooperating country can be denoted as X-C and T, respectively. In the latter case, the emission reduction has a poor effect, the net profit of the cooperating country is negative, and the net profit of the non-cooperating country surpasses that of the two countries in the former case. When both countries choose non-cooperation, their net profits will be zero. In this case, the optimal Nash equilibrium can be expressed as (non-cooperation, non-cooperation), adding to the difficulty in forming a global governance
action. The prisoner’s dilemma in climate
governance is illustrated in Table 1 below. Notwithstanding, real-world decision makers need to consider their own interests, as well as
others’ interests and expected profits, such that the plan is sufficiently fair and smooth to implement. In existing studies, the non-material factors of social benefits are introduced to evaluate the behavior of public good contributors, revealing that a person tends to contribute in advance when he/she knows that others will also make the contribution. This phenomenon is called a positive reciprocity.
Table 1.
Prisoner’s dilemma in climate
governance
2
1 Cooperation Non-cooperation Cooperation 𝑅 − 𝐶, 𝑅 − 𝐶 𝑋 − 𝐶, 𝑇 Non-cooperation 𝑇, 𝑋 − 𝐶 0,0
Under behavioral economics, humans are more willing to cooperate with each other than the standard economics model of self-interested actors (Ledyard, 1994). Smith & Williams, (1992) suggest that people are not fully self-centered but somewhat altruistic when the market information is incomplete and players are able to punish each other. There is a reciprocal motive between participants in collective action (Falk, Fehr, & Fischbacher, 2003). Humans recognize fairness from an altruistic perspective: it is unfair to reap a profit at the sacrifice of others. In fact, decision makers are both interested in profitmaking and disgusted with unfair outcomes (Fehr & Schmidt, 1999). An individual will always feel guilty whether their income is higher or lower than the neutral level, which damages his/her utility.
As far as climate negotiations are concerned, whether the responsibility for emission reduction is fair depends on the interests of each country and on whether the parties can reach a reciprocal agreement to promote collective behavior. Some negative and active reciprocity can be used to punish free riders, and ensure that self-interested change their behavior and choose cooperation. As traditional game theory, Dreber, Rand, & Fudenberg et al. (2008) have shown that unless effective penalties are imposed on free-riders, people’s behavior will be
reduced in repeated games. Yamagishi, (1986)
makes a prisoner’s dilemma experiment which
shows that the strong peer who have strong preference for fairness will have strong appeals for collective cooperation, and can make decisions from altruistic perspectives when knowing that others choose to cooperate, even if he sacrifices a part of self-interest. But if the other party chooses to betray, the strong peer will also punish it, even if the consequences of such punishment will be unprofitable for themselves. The most typical game of this altruistic punishment is the ultimatum game. The responder will punish the proponent of the self-consideration by rejecting the transaction, and the outcome of the game is that both sides of the game have nothing. Nyborg et al. (2016) [Error! Reference source not found.] believe social norms are an effective way to provide international public goods. Based on the model proposed by Rabin (1993) [Error! Reference source not found.], a utility function including reciprocal factors and participant beliefs was
established to solve the prisoner’s dilemma:
2
2 1
( , , ) ( , ) ( , ) ( , ) ( , ), ( 1, 2, )
i i k i i i k k i
k i i k
U a b c a b f b c f b c f a b i k i k
= +
+ =
%
% ， (4)
where, 𝑓1 is the goodwill of country i towards
country k:
) ( ) (
) ( )
, ( ) , (
min max
1
k k k k
k fair k i k k k i
b b
b a
b b
a f
− − =
;
𝑓̃2 is the belief of country i in the good faith
of country k:
) ( ) (
) ( )
, ( ) , ( ~
min max
2
i i i i
i fair i k i i i k
c c
c b
c c
b f
− − =
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430
𝛼 is the goodwill-utility conversion factor. If the two countries have no social preference, the value of 𝛼 equals zero.
The next step is to introduce the fairness factors of the two countries. As stated by Fehr and Schmidt (1999) [Error! Reference source not found.], individual decision makers are both self-interested and inequity-averse. When its income is lower than that of country k, country i will have a strong aversion against the inferior inequality, i.e. being jealous; when its income is higher than that of country k, country i will have a strong aversion against the advantageous inequality, i.e. being guilty. Both inequalities will impair the total utility of the two countries. Inspired by the Fehr-Schmidt model, this paper designs the following utility function based on the reciprocity factors:
( )
max(
, 0)
max(
, 0), ( ,
1, 2,
)
i i i j i
i i j
U x
x
x
x
x
x
i j
i
j
= −
−
−
−
=
(5)
where, 0 ≤ 𝛽𝑖< 1 and 𝛽𝑖< 𝛼𝑖. 𝛼𝑖 and 𝛽𝑖
respectively measures the aversion against the inferior inequality and the aversion against the
superior inequality. The prisoner’s dilemma after
considering reciprocity and fairness is depicted as Table 2 below.
As shown in Table 2, mutually beneficial cooperation is only possible when a country does not expect the betrayal from the other country.
The prisoner’s dilemma is solved when 𝛼 >
−2(𝑅−𝑋)2((𝐶+𝑇−𝑋)𝛽𝑖−𝐶+𝑅−𝑇)
2(𝑅−𝑋)(𝑅+𝐶−2𝑋)𝛽𝑖+2(𝐶−𝑅)(𝐶−𝑅/2−𝑋/2) or
𝛽𝑖
>−2𝑅
3+ (4𝑋 + 2𝐶 + 2𝑇 − 𝛼)𝑅2− (2𝑋2+ (4𝐶 + 4𝑇 + 𝛼)𝑋 − 3𝐶𝛼)𝑅 + (2𝐶 + 2𝑇)𝑋2+ 𝐶𝛼𝑋 − 2𝐶2𝛼
2(𝑅 − 𝑋)((−𝑋 + 𝐶 + 𝑇 + 𝛼)𝑅 + 𝑋2+ (−𝐶 − 𝑇 − 2𝛼)𝑋 + 𝐶𝛼)
It can also be seen that the psychological
factors have a great impact on the decision-making of the negotiators. With strong social preferences (i.e. big goodwill-conversion conversion factor and inferior inequality coefficient), the negotiating countries tend to make altruistic decisions. The public interests can be realized effectively, provided that the negotiators show the sincerity of cooperation and the yearn for fairness and rationality. The importance of reciprocity and trust was also mentioned by other scholars. For example, Buchholz & Sandler, (2017) suggest that the leadership affects a country’s contribution to
climate governance and the emission reduction in other countries.
The above analysis shows that developed countries should take the lead in climate governance, and express the willingness for cooperation and mutual trust in relevant negotiations.
Bargaining, communication and international climate negotiation
During the international climate negotiation, the two sides take turns to present their plans and strive to reach an equilibrium point. The cost of the bargaining process directly determines the success or failure of an agreement. After its plan is rejected by the other party, a party will wait for the other party to propose a new plan and start a new round of bargaining. Otherwise, it will be considered as weak by the other side. Hence, an opportunity cost will be incurred in the bargaining process that delays the climate cooperation. The longer the delay, the higher the cost will be. Despite two decades of negotiations, countries in the world have not reached consensus on many key issues of climate governance. This situation can be partially explained by the low discount rate and
Table 2.
Prisoner's dilemma after considering reciprocity and fairness
2
1 Cooperation Non-cooperation
Cooperation 2 2 2 2 ) ( 4 ) 2 ( ) ( 2 ) 2 ( , ) ( 4 ) 2 ( ) ( 2 ) 2 ( X R X C R X R X C R C R X R X C R X R X C R C R − + − + − + − + − − + − + − + − + − ) ( 4 2 ) 4 ( ) 4 ( ) 4 ) 4 4 4 ( ) 8 4 4 4 ( 4 ( , ) ( 4 6 ) 3 4 ( ) 4 ) 4 4 4 (( ) 9 4 4 ) 8 4 4 4 (( ) 4 4 ( 2 2 1 1 2 1 X R C R T X T C R T C X T R C X X R C R C C R T C X R C T R C X − − + + + − + − − − − + + + + + − − − − − + − − − − + + + + + + + + − − Non-cooperation ) ( 4 6 ) 3 4 ( ) 4 ) 4 4 4 (( ) 9 4 4 ) 8 4 4 4 (( ) 4 4 ( , ) ( 4 2 ) 4 ( ) 4 ( ) 4 ) 4 4 4 ( ) 8 4 4 4 ( 4 ( 2 2 2 2 1 2 X R C R C C R T C X R C T R C X X R C R T X T C R T C X T R C X − − − − + − − − − + + + + + + + + − − − − + + + − + − − − − + + + + + − 4 , 4 − −
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information asymmetry in actions or investments against climate change.
The discount rate is an important influencing factor of climate negotiations and policies. The negotiator with lower discount rate is relatively patient, as the present value depreciates slower over time. Studies by scholars such as Rubinstein, (1982) show that the higher the discount factor, the more discounted the negotiator has the advantage and patience to accept endless bargaining. So, what kind of discount rate should be adopted for climate change? Nordhaus, (2007) believes that climate investments have the same risk characteristics as other capital assets. However, Weitzman, (2007) argues that the current rate should be higher than the risk-free rate below the average return on the stock market. Brekke & Johansson-Stenman, (2008) even believe that the discount rate should be no higher than the risk-free rate. The discount rate has a negative correlation with ethics. Considering the damages of climate change to future generations, backward countries and poor people must be considered in climate policies. Given the externalities of climate change and the public nature of climate policies, the discount rate for climate investments should be lower than expected by market interest rates. Climate governance is an extremely long process with high uncertainty. The opportunity cost of apportionment is so low that countries can afford repeated bargaining. This is an important reason for the sluggishness of international climate negotiation.
The information in the bargaining of climate negotiation is severely asymmetrical. In behavioral game studies, many bargaining mechanisms have been proposed under information asymmetry to break the deadlock. A popular mechanism is the bilateral sealed-bid mechanism, in which both parties give their prices and the intermediate price is taken if the
buyer’s bid is greater than the seller’s bid.
Among the existing studies, Valley, Thompson, & Gibbons et al. (2002) verify that the transaction efficiency can be effectively improved through communication, although only a few would reveal their true retention value; effective communication can reduce false revelation and
test the other party’s retention value, forming a
mutually acceptable price and thus an equalized income. Other scholars discovered that the
dictator’s sales quota can be increased
effectively through self-introduction, in-depth
understanding and other communication practices (Frey & Bohnet, 2014). Kesternich, Löschel, & Ziegler et al. (2014) reveal that the burden sharing rules can partially reduce fairness bias in emission reduction negotiation. Lohse, Goeschl, & Diederich, (2017) find the positive correlation between mean response time and contribution of each party. Currently, practices have proved the important role of multilateral negotiation in international climate cooperation. This mechanism is being improved constantly, despite some twists and turns. For instance, the 2015 Paris Summit saw the parties holding an effective exchange before the meeting. The major countries reached consensus on some key issues, understood the bottom line of each other, and played a good leading role in communication. Therefore, a good consensus-seeking approach is to renovate the communication mechanism between countries, especially large countries, on climate change issues.
CONCLUSIONS
This paper probes into the individual decision and strategic interaction in international climate governance from the perspective of behavioral economics. Below are the main conclusions, which shed new light on solving climate governance dilemma.
(1) Standard economics can partially explain individual decision and strategic interaction in climate governance. However, the basic assumptions of standard economics are too ideal, failing to consider the effect of psychological factors. Hence, the behavioral economics was introduced to solve the dilemma in international climate governance.
(2) In international climate governance, rational individuals can predict the exact positive economic profits of emission reduction. Nevertheless, those not completely rational are reluctant to reduce emission, because they prefer to maintain the status quo and dislike the loss in short term. After all, emission reduction may lead to short-term losses (e.g. economic slowdown), despite its benefits to long-term development. Most people are short-sighted in decision-making and lured by the benefits of being a free-rider. Therefore, it is important to raise the awareness of long-term benefits and sustainable development for the public and the government.
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(3) Fairness is the core of international climate negotiation. Under self-interested bias and different national conditions, it is difficult to conclude an agreement when two countries evaluate fairness against different reference points. Some developed countries, which have emitted lots of GHG and provided technical and financial supports to others, tend to think that climate change is seriously overestimated. Meanwhile, the countries that emit less GHG and suffer from climate change often highlight the man-made causes of climate change and call for forcible global governance. Currently, the influential countries are trying to maximize their own interests by means of power and interest collusion, which will inevitably harm the interests of smaller countries. The excessive self-interested behavior of developed countries must be contained, and the interests must be balanced between the negotiators in climate negotiations.
(4) In international climate governance, participants involved in strategic interaction
suffer from the prisoner’s dilemma. Luckily, the
dilemma can be mitigated by the cooperation and reciprocity among these participants, though they are self-interested. The decision-making process is greatly affected by the
participants’ psychological factors. With strong
social preferences (i.e. big goodwill-conversion conversion factor and inferior inequality coefficient), the negotiating parties tend to make altruistic decisions
(5) The bargaining power of a country depends on discount factor and other issues. Developed countries generally prefer lengthy bargaining, while developing ones hope to reach an agreement soon. In addition, effective pre-game communication helps improve the efficiency of cooperation. Based on the UN multilateral mechanism, the information communication between countries, especially among the major ones, should be enhanced to reduce information asymmetry and transaction cost.
Acknowledgement
The work was Supported by “the Fundamental
Research Funds for the Central Universities” (Grant
number: N172304021), “the Natural Science Foundation of Hebei Province of China” (Grant
number: G2018501047), “Humanities and Social
Sciences Research Project of Higher Education Institutions of Hebei Province of China in 2019” (Grant number: SD192015), and “the MOE Project of
Key Research Institute of Humanities and Social
Sciences”.
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