The Global Climate Game

Abstract

I study emissions abatement in a global game of technological investments. Players invest in competing technologies. One technology is cheap and dirty, the other expensive but clean, and investments exhibit technological spillovers. The paper makes two main contributions. My first contribution is to resolve complications due to 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 for the entire externality deriving from technological spillovers but does not, in equilibrium, cost anything. Albeit derived in the context of climate change, the concept of a network subsidy is general and contributes to public economics broadly.

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