Inter-Generational Games with Dynamic Externalities and Climate Change Experiments

Dynamic externalities are at the core of many long-term environmental problems, from species preservation to climate change mitigation. We use laboratory experiments to compare welfare outcomes and underlying behavior in games with dynamic externalities under two distinct settings: traditionally-studied games with infinitely-lived decision makers, and more realistic inter-generational games. We show that if decision makers change across generations, resolving dynamic externalities becomes more challenging for two distinct reasons. First, decision makers’ actions may be short-sighted due to their limited incentives to care about the future generations’ welfare. Second, even when the incentives are perfectly aligned across generations, strategic uncertainty about the follower actions may lead to an increased inconsistency of own actions and beliefs about the others, making own actions more myopic. Inter-generational learning through history and advice from previous generations may improve dynamic efficiency, but may also lead to persistent myopia.