Compliance Technology and Self-enforcing Agreements

This paper analyzes a game in which countries repeatedly make emission and technology investment decisions. We derive the best equilibrium, i.e., the Pareto-optimal subgame-perfect equilibrium, when countries are insufficiently patient for folk theorems to be relevant. Relative to the first best, the best equilibrium requires countries to overinvest in technologies that are green, i.e., strategic substitutes for polluting, but to underinvest in adaptation and brown technologies, i.e., strategic complements to polluting. Under uncertainty, strategic investments reduce the need for a long and costly punishment phase or the probability that it will be triggered. Technological transfers and spillovers might discourage investments but can be necessary to motivate compliance when countries are heterogeneous.