Journal Article

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

Bård Harstad

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 4, pages 1527-1557
Published in print October 2012 | ISSN: 0034-6527
Published online March 2012 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rds011
Climate Contracts: A Game of Emissions, Investments, Negotiations, and Renegotiations

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  • Information, Knowledge, and Uncertainy
  • Environmental Economics
  • International Relations and International Political Economy
  • Public Economics

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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.

Keywords: Dynamic games; Incomplete contracts; Hold-up problems; Renegotiation design; Climate change; Environmental agreements; Q54; D86; H87; F53

Journal Article.  14407 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Environmental Economics ; International Relations and International Political Economy ; Public Economics

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