In this chapter, we present the major market failures and behavioural anomalies that are relevant to analyse energy and climate issues from an economic point of view. We start with a discussion on positive and negative externalities; next we discuss the public goods and common resource problem, followed by a presentation of the principal–agent and information problems, and then we provide a summary of the role of lack of competition in energy and energy-related markets. An important aspect described in this chapter is the role of behavioural anomalies, such as bounded rationality and bounded willpower. At the end of the chapter, we describe the most important energy and climate policies as well as the concept of sustainable development that should guide policy design. We also discuss issues in developing countries related to the topics discussed in the chapter.

Chapter 2 presents the (formal) theoretical framework and advances four arguments. First, whether or not majority support for public provision of insurance exists depends on the distribution of information. Second, some insurance is best provided via pay-as-you-go systems, but these involve a difficult time-inconsistency problem that private markets cannot solve. Some social insurance is therefore bound to remain almost entirely within the purview of the state. Third, people’s preferences regarding social insurance are also a function of the availability of private options. If social insurance is the only game in town, even those subsidizing the system will support it, leading to broad cross-class majorities. With private alternatives, the better-off will lower their support for public spending, which erodes the broad support public social policy programs traditionally enjoy. Fourth, parties continue to matter because they represent different risk groups, and we expect that partisan conflicts will extend into new areas, most importantly the regulation of information and how it may be used.

Chapter 3 theorizes border settlement as a bargaining process. Information and commitment problems as the most common obstacles to concluding border delimitation negotiations. Information exchange is facilitated by numerous mechanisms; commitment problems are driven by the value of the territory. Two broad categories of border territory are identified.Territory that contains a power endowment, defined as characteristics of the border capable of affecting state power, and territory that does not. The presence of these power endowments may trigger a commitment problem, making border settlement less likely. We identify alternative explanations for failed border settlement based on information problems.We also integrate expectations from theories of conflict management, with a focus on bilateral negotiations, third party mediation and legal methods. Bilateral negotiations help surmount the challenge of incomplete information, but cannot easily allay the fears underlying commitment problems. Third parties help with either challenge but, when addressing commitment problems, legal methods are more effective than mediation.

Chapter 5 presents a theory of borders and rivalry onset. When a border region contains attributes capable of affecting state power, a commitment problem is more likely to develop.The commitment problem undermines the settlement process by threatening the stability of any settlement agreement that might be signed, and therefore, encourages the involved states to eschew reaching an agreement in the first place, leaving borders unsettled and disputed. States then invest in foreign policy tools to compete over the insecure border, in the hopes of gaining a future bargaining advantage that will allow them to overcome the commitment problem and achieve a favorable and durable settlement.The competition produces a rivalry relationship between the states. We derive three hypotheses connecting unsettled borders, power endowments, and rivalry relations.In order to address alternative theoretical explanations, four additional hypotheses are presented relating rivalry initiation to regime type, power relations, alliances, and ethnic identify claims.

Chapter 4 evaluates the hypotheses introduced in Chapter 3. First, we provide descriptions of our variables and justifies a key sampling choice to focus only on contiguous dyads. Second, we implement our research design, presenting the evidence for evaluating the hypotheses. Patterns in the data suggest border settlement is less likely when power endowments are present in the border region, consistent with the expectations of the commitment problem framework. We find mixed support for the information problem hypotheses. Democratic neighbors are more likely than nondemocratic neighbors to settle their borders, allied states are more likely to settle borders than non-allied states, and power relations do not appear to affect settlement. When bargaining over territory that lacks power endowments, conflict management efforts foster border settlement.When power endowments are present, states are significantly less likely to settle their borders, and conflict management proves ineffective. The exception is legal methods, which generally increase the likelihood of settlement when power endowments are present.

Chapter 6 evaluates the relationship between border settlement and the onset of interstate rivalry.We estimate a series of models based on existing rivalry research.These models provide a baseline comparison to our fully specified models, which include unsettled borders and power endowments.Several key findings emerge.Strong support is found for all the expectations derived from the commitment problem framework. Unsettled borders are associated with an increased likelihood of rivalry initiation. Power endowments feature disproportionately more often in contiguous dyad-years with unsettled borders relative to settled borders. Neighboring states are more likely to form rivalries when contesting territory with power endowments. Mixed and relatively weak evidence is found for alternative explanations. Democratic neighbors are less likely to form rivalries but the results are not consistent across models. States closer in power are more likely to form rivalries but again the results are inconsistent. No relationship is found between allied states and rivalry formation, and little evidence is found that disputed ethnic identify claims are related to rivalry initiation.

Chapter 7 evaluates rivalry termination expectations.The rivalry process helps states overcome the commitment problem but not necessary through war, as traditionally expected.States instead use the rivalry process to consolidate power so as to disincentivize the revision of an eventual agreement. Given the difficulties of overcoming the commitment problem, we would expect these rivalries to be of longer duration and more violence prone.We derive a series of predictions from this argument. Conflict management techniques should be somewhat effective at helping rivals resolve border disagreements within rivalry but only in the absence of power endowments. The exception is legalized dispute resolution techniques, which may have features that help states overcome commitment problems. Border settlement within rivalry will facilitate rivalry termination but rival states bargaining over territorial borders that contain power endowments will be less likely to terminate. Relations between these rivals will generally improve after border settlement.We also derive hypotheses based whether the neighbors are democracies, share an alliance, power relations, and presence of ethnic kin.

Chapter 8 empirically evaluates the hypotheses proposed in Chapter 7. The first set of hypotheses examines the effectiveness of conflict management efforts to settle the border within the context of rivalry. The empirical patterns are consistent with our expectations. Negotiation and mediation generally increase the likelihood of border settlement but this relationship does not hold when power endowments are present. Legal approaches generally help neighbors settle borders with and without power endowments, but are generally more effective in the absence of power endowments. We then examine the relationship between border settlement, power endowments, and rivalry termination. The probability of rivalry termination increases with border settlement but termination is less likely when power endowments are present. Rivalry relationship transforms once border settlement occurs but the rivalry does not immediately terminate. Crises and disputes are less severe and of shorter durations.We find little evidence that democratic neighbors, allied, closer in parity, or the presence of ethnic kin in the border region affect the odds of rivalry termination.