The Global Climate Game

Abstract

I study emissions abatement in a global game of technological investments. Players choose between substitutable technologies. One technology is cheap and dirty, the other clean but expensive, and technologies exhibit strategic complementarities such as technology-specific technological spillovers. The paper makes two main contributions. My first contribution is to resolve equilibrium multiplicity in games of technological investment by addressing equilibrium selection through the use of global games. In well-identified cases the unique equilibrium is inefficient, motivating policy intervention. This leads to my second contribution, the introduction of network subsidies. A network subsidy allows the policymaker to correct the externality deriving from technological spillovers (and all externalities if use of the clean technology is an equilibrium of the underlying coordination game) but does not, in equilibrium, cost anything.

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