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Incomplete Contracts in Dynamic Games

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  • Bard Harstad

Abstract

I develop a dynamic model of costly private provision of public goods where agents can also invest in cost-reducing technologies. Despite the n+1 stocks in the model, the analysis is tractable and the (Markov perfect) equilibrium unique. The frame-work is used to derive optimal incomplete contracts in a dynamic setting. If the agents can contract on provision levels, but not on investments, they invest suboptimally little, particularly if the contract is short-term or close to its expiration date. To encourage sufficient investments, the optimal and equilibrium contract is more ambitious if it is short-lasting, and it is tougher to satisfy close to its expiration date. If renegotiation is possible, such a contract implements the first best. The results have important implications for how to design a climate treaty.

Suggested Citation

  • Bard Harstad, 2010. "Incomplete Contracts in Dynamic Games," Discussion Papers 1504, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1504
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    Citations

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    Cited by:

    1. Beccherle, Julien & Tirole, Jean, 2011. "Regional initiatives and the cost of delaying binding climate change agreements," Journal of Public Economics, Elsevier, vol. 95(11), pages 1339-1348.
    2. Kennedy, Matthew & Basu, Biswajit, 2014. "An analysis of the climate change architecture," Renewable and Sustainable Energy Reviews, Elsevier, vol. 34(C), pages 185-193.

    More about this item

    Keywords

    Dynamic private provision of public goods; dynamic common-pool problems; dynamic hold-up problems; incomplete contracts; renegotiation design; climate change and climate agreements JEL Classification Numbers: D86; H87; Q54; F53;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations

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