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Climate Contracts: A Game of Emissions, Investments, Negotiations, and Renegotiations

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  • Bard Harstad

Abstract

The paper presents a dynamic game where players contribute to a public bad, invest in technologies, and write incomplete contracts. Despite the n + 1 stocks in the model, the analysis is tractable and the symmetric Markov perfect equilibrium unique. If only the contribution levels are contractible, then investments are suboptimally small if the contract is short term or close to its expiration date. To encourage investments, the optimal contract is more ambitious if it is short term, and it is tougher to satisfy close to its expiration date and for players with small investment costs. If renegotiation is possible, such an incomplete contract implements the first-best. The framework helps to analyse emissions, investments, and international environmental agreements, and the results have important lessons for how to design a climate treaty. Copyright , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rds011
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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 4 ()
Pages: 1527-1557

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Handle: RePEc:oup:restud:v:79:y:2012:i:4:p:1527-1557

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Cited by:
  1. Wolfgang Buchholz & Alexander Haupt & Wolfgang Peters, 2012. "International Environmental Agreements, Fiscal Federalism, and Constitutional Design," Discussion Paper Series RECAP15 002, RECAP15, European University Viadrina, Frankfurt (Oder).
  2. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers 8633, C.E.P.R. Discussion Papers.
  3. Katerina Sherstyuk & Nori Tarui & Melinda Podor Wengrin & Jay Viloria & Tatsuyoshi Saijo, 2014. "Other-regarding behavior under collective action," Working Papers 201404, University of Hawaii at Manoa, Department of Economics.
  4. Tsur, Yacov & de Gorter, Harry, 2012. "Dynamic regulation of nonpoint source pollution when the number of emitters is large," Discussion Papers 122124, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
  5. James R. Markusen, 2014. "Per-Capital Income as a Determinant of International Trade and Environment Policies," CESifo Working Paper Series 4618, CESifo Group Munich.
  6. Thomas Norman & Heinrich H. Nax, 2011. "Leading the Way: Coalitional Stability in Technological Cooperation & Sequential Climate Policy," Economics Series Working Papers 585, University of Oxford, Department of Economics.

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