Working Paper: NBER ID: w18585
Authors: Marco Battaglini; Brd Harstad
Abstract: We analyze participation in international environmental agreements (IEAs) in a dynamic game where countries pollute and invest in green technologies. If complete contracts are feasible, participants eliminate the hold-up problem associated with their investments; however, most countries prefer to free-ride rather than participate. If investments are non-contractible, countries face a hold-up problem every time they negotiate; but the free-rider problem can be mitigated and significant participation is feasible. Participation becomes attractive because only large coalitions commit to long-term agreements that circumvent the hold-up problem. Under well-specified conditions even the first-best outcome is possible when the contract is incomplete. Since real-world IEAs fit in the incomplete contracting environment, our theory may help explaining the rising importance of IEAs and how they should be designed.
Keywords: International Environmental Agreements; Dynamic Game; Pollution; Green Technologies
JEL Codes: D86; F53; H87; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract completeness (D52) | investment behavior (G11) |
| noncontractible contracts (D86) | holdup problem (D86) |
| holdup problem (D86) | freerider problem (H40) |
| coalition size (D74) | successful participation in environmental agreements (F18) |
| incomplete contracts (D86) | first-best outcome (H21) |