Unilateral Actions the Case of International Environmental Problems

This derivative forms the basic incentives in the first part of this paper.

To illustrate how revelation of information influences the choices in the non-
cooperative equilibrium, assume the following one-period structure: the cost to
country 2, θi, is common knowledge, while the cost of country 1 is private in-
formation to this country, whereas country 2 hold a prior belief of ρ1 that its
cost is low.⁹ This case is illustrated in figure 2. The relevant reaction function
for country 1 is q₁ = q₁(θ₁,q₂(ρ₁),θ₂). Since it knows both countries’ costs, its
reaction function does not change when beliefs change. The reaction function
for country 2 is: q₂ = q₂(θ₂,q₁,ρ₁) . Here, the position of the reaction functions
shift with changes in ρ1, i.e., if costs are revealed as high, then the reaction
function shifts upwards, as illustrated in figure 2. Now, how can country 1 in-
crease the reductions of country 2? If it is revealed that the costs of country 1
are high, then due to (3), country 2 increases its reductions from q₂^nc(ρ₁,θ₂) to
q₂^nc(H,θ₂) , while at the same time the reduction of country 1 decreases from
q₁^nc(ρ₁,θ₂) to q₁^nc(H,θ₂) . In figure 2, the indifference curve going through
point A shows that this is a preferred point for country 1. If country 1 can report
verifiable information about θi costlessly, (or at sufficiently low cost) to country
2, or when the costs of being informed are small, then it is optimal for country i
to reveal its costs.

9 See Tirole (1988, ch. 8) for a detailed examination on this issue.

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