The Dynamics of Climate Agreements

I provide a novel dynamic model with private provision of public bads and investments in technologies. The analysis is tractable and the MPE unique. By adding incomplete contracts, I derive implications of and for international climate treaties. While the non-cooperative equilibrium is bad, short-term agreements are worse due to hold-up problems. A long-term agreement should be more ambitious if it is relatively short-lasting and the technological externality large. The length itself should increase in this externality. With renegotiation, the outcome is …rst best. The technological externalities are related to trade agreements, making them strategic substitutes to climate treaties. Key words: Dynamic private provision of public goods, dynamic common pool problems, dynamic hold-up problems, incomplete contracts, time horizon of contracts, renegotiation design, climate change, climate agreements and trade agreements JEL: D86, Q54, F55, F53, H87 * Thanks to the audiences at the 2009 ASSA meeting, the University of British Columbia, Caltech, the Chicago Fed, the Chicago Area Political Economy conference, the University of Copenhagen, Emory University, the FEEM conference on Coalitions for Climate Cooperation, Helsinki School of Economics, the Marshall School of Business, the MSRI conference on climate change, Northwestern University, University of Oslo, Paris School of Economics, Simon Fraser University and Stockholm University. In addition or particular, I have bene…tted from the comments of Philippe Aghion, Je¤ Campbell, Yeon-Koo Che, Rolf Golombek, Michael Hoel, Ben Jones, Larry Karp, Charles Kolstad, Jiang Ning and Roberto Veneziani.