Policies and Instruments for Self-Enforcing Treaties

50 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Bård Harstad

Bård Harstad

University of Oslo - Department of Economics

Francesco Lancia

University of Salerno; Centre for Economic Policy Research (CEPR); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Alessia Russo

BI Norwegian Business School

Date Written: July 2020

Abstract

We characterize the optimal policy and policy instruments for self-enforcing treaties when countries invest in green technology before they pollute. If the discount factor is too small to support the first best, then both emissions and investments will be larger than in the first best, when technology is expensive. When technology is inexpensive, countries must instead limit or tax green investment in order to make future punishment credible. We also uncover a novel advantage of price regulation over quantity regulation, namely that when regulation is sufficiently flexible to permit firms to react to non-compliance in another country, the temptation to defect is reduced. The model is tractable and allows for multiple extensions.

Keywords: climate change, compliance, environmental agreements, green technology, policy instruments, repeated games, self-enforcing treaties

JEL Classification: D86, F53, H87, Q54

Suggested Citation

Harstad, Bard and Lancia, Francesco and Russo, Alessia, Policies and Instruments for Self-Enforcing Treaties (July 2020). CEPR Discussion Paper No. DP15044, Available at SSRN: https://ssrn.com/abstract=3661387

Bard Harstad (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://www.sv.uio.no/econ/english/people/aca/bardh/

Francesco Lancia

University of Salerno ( email )

Via Giovanni Paolo II, 132
Fisciano, Salerno 84084
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Alessia Russo

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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