Harstad, Bård, Russo, Alessia and Lancia, Francesco (2019) Compliance Technology and Self-enforcing Agreements. Journal of the European Economic Association, 17 (1). pp. 1-30.

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Abstract

This paper analyzes a game in which countries repeatedly make emission and
technology investment decisions. We derive the best equilibrium, i.e., the Paretooptimal subgame-perfect equilibrium, when countries are insufficiently patient for
folk theorems to be relevant. Relative to the first best, the best equilibrium requires
countries to overinvest in technologies that are green, i.e., strategic substitutes for
polluting, but to underinvest in adaptation and brown technologies, i.e., strategic complements to polluting. Under uncertainty, strategic investments reduce the
need for a long and costly punishment phase or the probability that it will be triggered. Technological transffers and spillovers might discourage investments but can
be necessary to motivate compliance when countries are heterogeneous.