Caparrós, Alejandro, and Michael Finus. “Coalition Formation to Provide Public Goods under Weakest link Technology.” Forthcoming: Journal of Public Economic Theory, DOI: 10.1111/jpet.12426
We analyze the canonical coalition formation model of international environmental agreements (IEAs) under a weakest-link technology and compare it with the well-known summation technology. That is, benefits from the provision of a public good do not depend on the sum but on the minimum of individual contributions, an assumption appropriate for many regional and global public goods, like fighting a fire which threatens several communities, compliance with minimum standards in marine law, protecting species whose habitat cover several countries, fiscal convergence in a monetary union and curbing the spread of an epidemic. Compared to the summation technology, we demonstrate that many more general results can be obtained and under much more general assumptions. We show, for the standard assumption of symmetric players, that policy coordination is not necessary. For asymmetric players, without transfers, though all coalitions are Pareto-optimal, no coalition with a provision level above the non-cooperative equilibrium is stable. However, if an optimal transfer is used, an e¤ective non-trivial coalition exists. We show how various forms of asymmetry relate to stability and the welfare gains from cooperation. We find a paradox: asymmetries which are conducive to stability of coalitions imply low welfare gains from cooperation and vice versa.