The Global Climate Game

Abstract

I study the adoption of renewable technologies to mitigate climate change in a dynamic public good coordination game. Because dynamic coordination games typically have multiple equilibria, I use a global games approach to inform equilibrium selection. My first contribution is to show that the celebrated result on equilibrium selection in one-shot games generalizes to dynamic global games with both static and dynamic strategic complementarities. The unique equilibrium is determined by fundamentals of the renewable technology, not sunspots, and technological lock-in can occur. Coordination on fossil fuels may be rational even when that is inefficient and all agents would prefer to coordinate on renewables instead. Motivated by the latter observation, my second contribution is to design a policy 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. To protect the policymaker against off-equilibrium behavior, I also design a network tax-subsidy scheme that is entirely self-financed, implying zero net spending on network subsidies whatever the technologies chosen.

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