The formation of an international environmental agreement as a two-stage exclusive cartel formation game with transferable utilities

We construct a two-stage exclusive cartel formation game with utility transfers to model the formation process of an international environmental agreement. Our results show that in the first stage of low degree of consensus, engaging in utility transfers by asymmetric countries will accomplish little. In contrast, in the second stage of higher degree of consensus, it is more likely for asymmetric countries to engage in monetary transfers to form the grand coalition, particularly if a small stable coalition has already been formed in the first stage. This article therefore provides a theoretical perspective to explain why it is more likely for some developed countries to initiate an IEA formation process by forming a small stable coalition first before engaging in monetary transfers to form the grand coalition with all the other countries. Such a perspective is consistent with the historical development of the Montreal Protocol and may also explain the difficulty for asymmetric countries to form the grand coalition at the beginning of the IEA formation process of the Kyoto Protocol.