Showing papers in "Economic Theory in 2012"
TL;DR: The literature on global climate change has largely ignored the small but positive steps that many public and private actors are taking to reduce greenhouse gas emissions as discussed by the authors, and it is important to balance the major attention on global solutions as the only strategy for coping with climate change.
Abstract: The literature on global climate change has largely ignored the small but positive steps that many public and private actors are taking to reduce greenhouse gas emissions. A global policy is frequently posited as the only strategy needed. It is important to balance the major attention on global solutions as the only strategy for coping with climate change. Positive actions are underway at multiple, smaller scales to start the process of climate change mitigation. Researchers need to understand the strength of polycentric systems where enterprises at multiple levels may complement each other. Building a global regime is a necessity, but encouraging the emergence of a polycentric system starts the process of reducing greenhouse gas emissions and acts as a spur to international regimes to do their part.
345 citations
TL;DR: In this article, a two-region, two-goods simplified general equilibrium framework was developed to explore the key mechanisms and factors underlying the size of carbon leakages, showing that coal supply elasticity plays a critical role, while substitution elasticities between traded goods and international capital mobility appear relatively less influential.
Abstract: The effectiveness of unilateral action to curb carbon emissions has been dismissed because of possible “carbon leakages”, this referring to the rise of emissions in non-participating countries. This paper offers a general equilibrium (GE) exploration of the key mechanisms and factors underlying the size of carbon leakages. We developed a two-region, two-goods simplified GE framework, incorporating three types of fossil fuels (coal, oil and low-carbon energy), international trade and capital mobility. The model was designed to make tractable extensive multidimensional sensitivity analysis. The results suggest that the coal supply elasticity plays a critical role, while substitution elasticities between traded goods and international capital mobility appear relatively less influential. The shape of the production function also matters for the size of the leakages. Confirming the results obtained with large computable GE models, for a wide range of parameters’ values carbon leakages appear to be small. Therefore, the argument that unilateral carbon abatement action taken by a large group of countries (such as the Annex 1 group) is flawed by significant carbon leakages is not supported by our sensitivity analysis. The likelihood of small leakages favours in fact the formation of a worldwide coalition to stabilise climate change.
142 citations
TL;DR: In this paper, an elimination tournament with heterogenous contestants whose ability is common-knowledge is modeled as an all-pay auction, and equilibrium efforts are in mixed strategies yielding complex dynamics: endogenous win probabilities in each match depend on other matches' outcome through the identity of the expected opponent in the next round.
Abstract: We study an elimination tournament with heterogenous contestants whose ability is common-knowledge. Each pair-wise match is modeled as an all-pay auction. Equilibrium efforts are in mixed strategies, yielding complex dynamics: endogenous win probabilities in each match depend on other matches’ outcome through the identity of the expected opponent in the next round. The designer seeds competitors according to their ranks. For tournaments with four players we find optimal seedings for three different criteria: (1) maximization of total tournament effort; (2) maximization of the probability of a final among the two top ranked teams; (3) maximization of the win probability for the top player. We also find the seedings ensuring that higher ranked players have a higher winning probability. We compare our predictions with data from NCAA basketball tournaments.
139 citations
TL;DR: In this article, the results of laboratory experiments on rent-seeking contests with endogenous participation are reported, showing that women participate in the contest at the same rate as men and that when the prize is large, contest participants earn more than the outside option.
Abstract: We report the results of laboratory experiments on rent-seeking contests with endogenous participation. Theory predicts that (a) contest entry and rent-seeking expenditures increase with the size of the prize and (b) earnings are equalized between the contest and the outside option. While the directional predictions offered in (a) are supported in the data, the level predictions are not. Prediction (b) is not supported in the data: when the prize is large, contest participants earn more than the outside option. When the prize is small, contest participants earn less. Previous studies of gender and contest competition suggest that females should (a) not perform as well in the contest; and (b) enter at a lower rate. We find some support for (a) but not for (b). Women participate in the contest at the same rate as men.
139 citations
TL;DR: The authors calibrates a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto-improvement from mitigation investment, and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.
Abstract: Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto-improvement from mitigation investment, and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.
120 citations
TL;DR: In this article, the authors investigated the optimal structure of multi-stage sequential elimination games and found that for concave and moderately convex impact functions, the contest organizer should allocate the entire prize purse to a single final prize, regardless of the contest sequence.
Abstract: This paper investigates the optimal (effort-maximizing) structure of multi-stage sequential-elimination contests. We allow the contest organizer to design the contest structure using two instruments: contest sequence (the number of stages, and the number of contestants remaining after each stage), and prize allocation. When the contest technology is sufficiently noisy, we find that multi-stage contests elicit more effort than single-stage contests. For concave and moderately convex impact functions, the contest organizer should allocate the entire prize purse to a single final prize, regardless of the contest sequence. Additional stages always increase total effort. Therefore, the optimal contest eliminates one contestant at each stage until the finale when a single winner obtains the entire prize purse. Our results thus rationalize various forms of multi-stage contests that are conducted in the real world.
113 citations
TL;DR: In this paper, the problem of finding an analytic solution to a first-price auction with two buyers having valuations uniformly distributed on (v 1, v1) and (v 2, v2) was solved.
Abstract: In 1961, Vickrey posed the problem of finding an analytic solution to a first-price auction with two buyers having valuations uniformly distributed on (v 1 , v1) and (v 2 , v2).Todate,onlyspecialcasesoftheproblemhavebeensolved.Inthispaper, we solve this general problem and in addition allow for the possibility of a binding minimum bid. Several interesting examples are presented, including a class where the two bid functions are linear.
111 citations
TL;DR: In this article, a unified framework for characterizing symmetric equilibrium in simultaneous move, two-player, rank-order games with complete information is presented, in which each player's strategy generates direct or indirect affine "spillover" effects that depend on the rank order of her decision variable.
Abstract: This paper presents a unified framework for characterizing symmetric equilibrium in simultaneous move, two-player, rank-order contests with complete information, in which each player’s strategy generates direct or indirect affine “spillover” effects that depend on the rank-order of her decision variable. These effects arise in natural interpretations of a number of important economic environments, as well as in classic contests adapted to recent experimental and behavioral models where individuals exhibit inequality aversion or regret. We provide the closed-form solution for the symmetric Nash equilibria of this class of games, and show how it can be used to directly solve for equilibrium behavior in auctions, pricing games, tournaments, R&D races, models of litigation, and a host of other contests.
98 citations
TL;DR: In this paper, the authors study dynamic committee bargaining over an infinite horizon with discounting, where a committee proposal is generated by a random recognition rule, the committee chooses between the proposal and a status quo by majority rule, and the voting outcome in period t becomes the status quo in period T + 1.
Abstract: We study dynamic committee bargaining over an infinite horizon with discounting. In each period, a committee proposal is generated by a random recognition rule, the committee chooses between the proposal and a status quo by majority rule, and the voting outcome in period t becomes the status quo in period t + 1. We study symmetric Markov equilibria of the resulting game and conduct an experiment to test hypotheses generated by the theory for pure distributional (divide-the-dollar) environments. In particular, we investigate the effects of concavity in the utility functions, the existence of a Condorcet winning alternative, and the discount factor (committee “impatience”). We report several new findings. Voting behavior is selfish and myopic. Status quo outcomes have great inertia. There are strong treatment effects that are in the direction predicted by the Markov equilibrium. We find significant evidence of concave utility functions.
82 citations
TL;DR: This paper studied the vulnerability of three school choice mechanisms, namely, the Boston mechanism, the top trading cycles mechanism and the student-optimal stable mechanism, to manipulation via capacities and pre-arranged matches.
Abstract: Many school districts in the US. employ centralized clearing houses to assign students to public schools. An important potential threat against any school choice mechanism is the tendency of schools to circumvent the procedure via two kinds of strategic manipulation: manipulation via capacities and manipulation via pre-arranged matches. This paper studies the extent of the vulnerability of three prominent school choice mechanisms that have been adopted (or, considered for adoption) by some school districts in the US. We find that the highly debated Boston mechanism as well as the top trading cycles mechanism are immune to manipulation via capacities, unlike the student-optimal stable mechanism (SOSM). We show that SOSM is immune to manipulation via capacities if and only if the priority structure satisfies an acyclicity condition proposed by Ergin (Econometrica 70:2489–2497, 2002). On the other hand, we show that essentially no mechanism is immune to manipulation via pre-arranged matches.
74 citations
TL;DR: In this paper, the existence, uniqueness and properties of equilibria in incompletely discriminating Tullock contests with logistic contest success functions, when contestants are risk averse are analyzed.
Abstract: We analyze existence, uniqueness and properties of equilibria in incompletely discriminating Tullock contests with logistic contest success functions, when contestants are risk averse. We prove that a Nash equilibrium for such a contest exists, but give an example of a symmetric contest with both symmetric and asymmetric equilibria, showing that risk aversion may lead to multiple equilibria. Symmetric contests have unique symmetric equilibria but additional conditions are necessary for general uniqueness. We also study the effects on incumbents of additional competitors entering the contest under these conditions and examine the effects of risk aversion on rent dissipation in symmetric and asymmetric contests.
TL;DR: In this paper, a class of sustainable recursive social welfare functions within Koopmans' general frame-work is considered and axiomatized by means of a weak equity condition ("Hammond equity for the future") and general existence is established.
Abstract: Whatethicalcriterionforintergenerationaljusticeshouldbeadopted,e.g., when faced with the task of managing the global environment? Koopmans' axiomat- ization of discounted utilitarianism is based on seemingly compelling conditions, yet this criterion leads to hard-to-justify outcomes. The present analysis considers a class of sustainable recursive social welfare functions within Koopmans' general frame- work. This class is axiomatized by means of a weak equity condition ("Hammond Equity for the Future") and general existence is established. Any member of the class
TL;DR: In this paper, the authors developed a framework to study the economic impact of infectious diseases by integrating epidemiological dynamics into a discrete time one sector growth model, where susceptible individuals choose how much labor to supply so that the effective labor supply comprises of the proportion of healthy individuals (extensive margin) and their labor supply (intensive margin).
Abstract: This paper develops a framework to study the economic impact of infectious diseases by integrating epidemiological dynamics into a discrete time one sector growth model. An infectious disease with SIS dynamics affects the labor force and the infected individuals are too ill to work. The susceptible (healthy) individuals choose how much labor to supply so that the effective labor supply comprises of the proportion of healthy individuals (extensive margin) and their labor supply (intensive margin). The epidemiology of disease transmission is modeled explicitly and the global dynamics of the economic variables is studied. Depending on how infectious the disease is, the disease may be eradicated or become endemic. If the disease is infectious enough, cycles and chaos emerge in the economy. A leading example illustrates the model: we show how the system dynamics change as the parameters vary and how the intensive margin responds to changes in the extensive margin due to the spread of diseases. We show how the fluctuations can be stabilized via disease control methods.
TL;DR: The authors studied a simple model of observational learning where agents care not only about the information of others but also about their actions and showed that despite complex strategic considerations that arise from forward-looking incentives, herd behavior can arise in equilibrium.
Abstract: This paper studies a simple model of observational learning where agents care not only about the information of others but also about their actions. We show that despite complex strategic considerations that arise from forward-looking incentives, herd behavior can arise in equilibrium. The model encompasses applications such as sequential elections, public good contributions, and leadership charitable giving.
TL;DR: This paper developed context-free interpretations for the relative and partial Nth degree risk attitude measures and showed that various conditions on theses measures are utility characterizations of the effects of scaling general stochastic changes in different settings.
Abstract: This paper develops context-free interpretations for the relative and partial Nth degree risk attitude measures and show that various conditions on theses measures are utility characterizations of the effects of scaling general stochastic changes in different settings. It is then shown that these characterizations can be applied to generalize comparative statics results in a number of important problems, including precautionary savings, optimal portfolio choice, and competitive firms under price uncertainty.
TL;DR: In this paper, the authors compare emissions taxes and quotas when a (strategic) regulator and non-strategic firms have asymmetric information about abatement costs, and all agents use Markov perfect decision rules.
Abstract: We compare emissions taxes and quotas when a (strategic) regulator and (non-strategic) firms have asymmetric information about abatement costs, and all agents use Markov perfect decision rules. Firms make investment decisions that affect their future abatement costs. For general functional forms, firms' investment policy is information-constrained efficient when the regulator uses a quota, but not when the regulator uses an emissions tax. This advantage of quotas over emissions taxes has not previously been recognized. For a special functional form (linear-quadratic) both policies are constrained efficient. Using numerical methods, we find that a tax has some advantages in this case.
TL;DR: In this article, the authors examined a non-constant-sum version of the Colonel Blotto game and showed that if the level of asymmetry between the players' budgets is below a threshold, then there exists a one-to-one mapping from the unique set of equilibrium univariate marginal distribution functions in the constant-sum game to those in the non-continuous-sum one.
Abstract: The Colonel Blotto game is a two-player constant-sum game in which each player simultaneously distributes his fixed level of resources across a set of contests. In the traditional formulation of the Colonel Blotto game, the players’ resources are “use it or lose it” in the sense that any resources that are not allocated to one of the contests are forfeited. This article examines a non-constant-sum version of the Colonel Blotto game that relaxes this use it or lose it feature. We find that if the level of asymmetry between the players’ budgets is below a threshold, then there exists a one-to-one mapping from the unique set of equilibrium univariate marginal distribution functions in the constant-sum game to those in the non-constant-sum game. Once the asymmetry of the players’ budgets exceeds the threshold, this relationship breaks down and we construct a new equilibrium.
TL;DR: This article examined how the probability of persuading an audience depends on resources expended by contending parties as well as on other factors such as the truth and other objective parameters of the environment.
Abstract: We examine how the probability of persuading an audience depends on resources expended by contending parties as well as on other factors. We use a Bayesian approach whereby the audience makes inferences solely based on the evidence produced by the contestants. We find conditions that yield the well-known additive contest success function, including the logit function. We also find conditions that produce a generalized “difference” functional form. In all cases, there are three main determinants of audience choice: (i) the truth and other objective parameters of the environment; (ii) the biases of the audience, and (iii) the resources expended by the interested parties.
TL;DR: In this paper, the authors experimentally investigate a legislative bargaining model with both public and particularistic goods, and show that there is near exclusive public good provision in the pure public good region, in the private private good region minimum winning coalitions sharing private goods predominate, and in the mixed region proposers generally take some specificistic goods for themselves, allocating the remainder to public goods.
Abstract: We experimentally investigate a legislative bargaining model with both public and particularistic goods. Consistent with the qualitative implications of the model: there is near exclusive public good provision in the pure public good region, in the pure private good region minimum winning coalitions sharing private goods predominate, and in the “mixed” region proposers generally take some particularistic goods for themselves, allocating the remainder to public goods. As in past experiments, proposer power is not nearly as strong as predicted, resulting in public good provision decreasing in the mixed region as its relative value increases, which is inconsistent with the theory.
TL;DR: In this article, the authors examine a setting in which security or protection can be provided by self-governing groups or by for-profit entrepreneurs (kings, kleptocrats, or mafia dons), and explain the tendency towards autocracy both in history, before the appearance of modern representative governance, and in many low-income countries in modern times.
Abstract: We examine a stark setting in which security or protection can be provided by self-governing groups or by for-profit entrepreneurs (kings, kleptocrats, or mafia dons). Although self-governance is best for the population, it faces problems of long-term viability. Typically, in providing security, the equilibrium market structure involves competing lords, a condition that leads to a tragedy of coercion: all the savings from the provision of collective protection are dissipated and welfare can be as low as, or even lower than, in the absence of the state. Thus, we explain the tendency towards autocracy both in history, before the appearance of modern representative governance, and in many low-income countries in modern times.
TL;DR: In this paper, a cover version of the Heidhues-Kőszegi-Rabin model is proposed to analyze optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay.
Abstract: This paper reformulates and simplifies a recent model by Heidhues and Kőszegi (The impact of consumer loss aversion on pricing, Mimeo, 2005), which in turn is based on a behavioral model due to Kőszegi and Rabin (Q J Econ 121:1133–1166, 2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues–Kőszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this “cover version” of the Heidhues–Kőszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm’s incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs.
TL;DR: In this paper, the authors studied how promotion tournaments motivate workers to accumulate human capital when wages are constrained by outside labor markets, and they showed that a wage floor leads to insufficient human capital investment in competitive firms, but could lead to excessive investment in technologically superior firms.
Abstract: This paper studies how promotion tournaments motivate workers to accumulate human capital when wages are constrained by outside labor markets. Patient firms can retain some control over tournament prizes through a relational contract, but if the firms are competitive, full efficiency does not obtain in equilibrium even for discount factors arbitrarily close to one. Full efficiency, however, may be feasible in firms with superior technologies; thus, technological efficiency breeds incentive efficiency. The paper also shows that a wage floor leads to insufficient human capital investment in competitive firms, but could lead to excessive investment in technologically superior firms.
TL;DR: In this article, it was shown that a maximal anonymity axiom compatible with Pareto is a non-constructible object; its existence relies on the Axiom of Choice.
Abstract: Global environmental issues—like biodiversity conservation or climate change—are in reality long term issues that are not properly taken into account with traditional models that incorporate the impatience axiom manifested in fixed discount factors and in the use of present discounted utility criteria. When both the short and the very long run are important, one can appeal to overtaking criteria and Chichilnisky criteria. Unfortunately, overtaking criteria are highly incomplete. In order to decrease this incompleteness, stronger anonymity (or equity) axioms were developed. I show that a maximal anonymity axiom compatible with Pareto is a non-constructible object; its existence relies on the Axiom of Choice. The Chichilnisky criterion is based upon two axioms: non dictatorship of the present and non dictatorship of the future. Here, the very long run is captured by a finitely additive measure. Such a measure is a non-constructible object and has therefore no explicit description.
TL;DR: In this paper, a dynamic model of elections, government formation, and legislation in a parliamentary democracy with proportional representation is presented, in which the policy chosen in one period becomes the status quo for the next period.
Abstract: This paper presents a dynamic model of elections, government formation, and legislation in a parliamentary democracy with proportional representation in which the policy chosen in one period becomes the status quo for the next period. The electorate votes strategically by taking into account the likely governments that parties would form based on their representation and the policies they would choose as a function of the status quo. The status quo thus affects both the election outcomes and the bargaining power of the parties during government formation. A formateur party therefore has incentives to strategically position the current policy to gain an advantage in both the next election and the subsequent bargaining over government formation and policy choice. These incentives can give rise to centrifugal forces that result in policies that are outside the Pareto set of the parties.
TL;DR: In this article, the authors restrict attention to the set of convex combinations between the optimal discounted utilitarian program and the stationary program leading to the green golden rule, and show that an optimal path in this set exists under rather weak sufficient conditions on the fundamentals of the problem.
Abstract: Chichilnisky’s criterion for sustainability has the merit to be, so far, the unique explicit, complete and continuous social welfare criterion that combines successfully the requirement of efficiency with an instrumental notion of intergenerational equity (no dictatorship of the present and no dictatorhsip of the future) But it has one drawback: when applied in the context of renewable resources, and with a constant discount factor, there exists no exploitation path that maximizes this criterion The present article suggests a way to cope with this problem The idea is to restrict attention to the set of convex combinations between the optimal discounted utilitarian program and the stationary program leading to the green golden rule It is shown that an optimal path in this set exists under rather weak sufficient conditions on the fundamentals of the problem Some ethical properties of this approach are also discussed In some cases, it turns out that the restricted solution implies no loss of efficiency and benefits intermediate and infinitely distant generations
TL;DR: In this article, the authors developed three general approaches to obtain Lorenz rankings of rules for the adjudication of conflicting claims, and derived a criterion to deduce Lorenz domination for arbitrarily many claimants from Lorenz dominance in the two-claimant case.
Abstract: For the adjudication of conflicting claims, we develop three general approaches to obtain Lorenz rankings of rules. Our first approach concerns a parameterized family that contains several important rules (Thomson in Soc Choice Welf 31:667–692, 2008). We give a condition that the parameters defining two members of the family should satisfy for one of them to Lorenz dominate the other. Our second approach exploits the concept of “consistency” (Young in Math Oper Res 12:398–414, 1987). We derive a criterion to deduce Lorenz domination for arbitrarily many claimants from Lorenz domination in the two-claimant case. Our third approach is based on the notion of an “operator” on the space of rules (Thomson and Yeh in J Econ Theory 143:177–198, 2008). We develop conditions under which operators preserve the Lorenz order, or reverse it. As corollaries of our general theorems, we obtain rankings of most of the rules that have been discussed in the literature.
TL;DR: In this article, the authors show that in incomplete markets, regardless of traders' discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth, and that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices.
Abstract: In complete markets economies (Sandroni in Econometrica 68:1303–1341, 2000), or in economies with Pareto optimal outcomes (Blume and Easley in Econometrica 74:926–966, 2006), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth.
TL;DR: The dynamic programming approach is exploited in order to identify the closed loop policy function, and the consumption smoothing mechanism in an endogenous growth model with time to build, linear technology and irreversibility constraint in investment.
Abstract: In this paper, the dynamic programming approach is exploited in order to identify the closed loop policy function, and the consumption smoothing mechanism in an endogenous growth model with time to build, linear technology and irreversibility constraint in investment. Moreover, the link among the time to build parameter, the real interest rate, and the magnitude of the smoothing effect is deeply investigated and compared with what happens in a vintage capital model characterized by the same technology and utility function. Finally, we have analyzed the effect of time to build on the speed of convergence of the main aggregate variables.
TL;DR: The authors analyzes a simple model formulated by Hurwicz (Japan World Economics 7:49-74, 1995) of two agents, a polluter and a pollutee, and two commodities: "money" (standing for an exchangeable private good desired by both agents) and "pollution" (a public commodity desired by the polluter but undesired by the pollutione).
Abstract: This paper, which builds on Chipman (The economist’s vision. Essays in modern economic perspectives, 131–162, 1998), analyzes a simple model formulated by Hurwicz (Japan World Economics 7:49–74, 1995) of two agents—a polluter and a pollutee—and two commodities: “money” (standing for an exchangeable private good desired by both agents) and “pollution” (a public commodity desired by the polluter but undesired by the pollutee). There is also a government which issues legal rights to the two agents to emit a certain amount of pollution, which can be bought and sold with money. It is assumed that both agents act as price-takers in the market for pollution rights, so that competitive equilibrium is possible. The “Coase theorem” (so-called by Stigler (The theory of price, 1966) asserts that the equilibrium amount of pollution is independent of the allocation of pollution rights. A sufficient condition for this was (in another context) obtained by Edgeworth (Giorn Economics 2:233–245, 1891), namely that preferences of the two agents be “parallel” in the money commodity, whose marginal utility is constant. Hurwicz (Japan World Economics 7:49–74, 1995) argued that this parallelism is also necessary. This paper, which provides an exposition of the problem, raises some questions about this result, and provides an alternative necessary and sufficient condition.
TL;DR: In this paper, the authors examined the differential incentives of countries on different trajectories of capital growth and showed that the presence of capital execerbates the tragedy of the common, and that even with high discount factors, the threat of reverting to the inefficient "tragedy" equilibrium is not sufficient to deter the emissions growth of the fastest growing economies.
Abstract: Global warming is now recognized as a significant threat to sustainable development on an international scale. One of the key challenges in mounting a global response to it is the seeming unwillingness of the fastest growing economies such as China and India to sign a treaty that limits their emissions. The aim of this paper is to examine the differential incentives of countries on different trajectories of capital growth. A benchmark dynamic game to study global warming, introduced in Dutta and Radner (2009), is generalized to allow for exogenous capital accumulation. It is shown that the presence of capital execerbates the “tragedy of the common”. Furthermore, even with high discount factors, the threat of reverting to the inefficient “tragedy” equilibrium is not sufficient to deter the emissions growth of the fastest growing economies—in contrast to standard folk theorem like results. However, foreign aid can help. If the slower growth economies—like the United States and Western Europe—are willing to make transfers to China and India then the latter can be incentivized to cut emissions. Such an outcome is Pareto improving for both slower and faster growth economies.