Games with Dynamic Externalities and Climate Change Experiments

We report on laboratory experiments with series of games with dynamic externalities, where the current actions of each player affect not only the player’s payoff today, but also the group payoffs levels of the game that will be played tomorrow. The motivating example is the climate change problem, where welfare opportunities (payoff levels) in the present depend on the stock of greenhouse gases (GHG) accumulated in the past, with higher current emissions leading to lower future payoffs. We investigate whether socially optimal actions may be sustained in such dynamic externality games with changing payoffs if no explicit enforcement mechanisms are present. Two main experimental treatments are studied. In the Long-Lived treatment, the dynamic game is played by the same group of subjects who interact for many periods (generations). This represents an idealistic setting where countries’ decision-makers and citizens are motivated by long-term welfare of their countries. In the Inter-Generational treatment, the dynamic game is played by several groups (generations) of subjects, with later generations having access to history and advice from previous generations. This represents a more realistic setting in which the countries’ decision-makers and citizens may be motivated more by the immediate welfare and may care only partially about the future generations’ payoffs. Experimental results indicate that in the Long-Lived treatment, many groups of subjects were able to avoid the myopic Nash outcome and to sustain or come back close to the socially optimal emissions and GHG stock levels. In the Inter-Generational treatments, subject decisions were often myopic. These findings suggest that international dynamic enforcement mechanisms (treaties) are necessary to control GHG emissions.