Published in:
Journal of Political Economy 2015 (forthcoming)
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.