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Title:Incomplete contracts in dynamic games PDF Logo
Authors:Harstad, Bård
Issue Date:2010
Series/Report no.:Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1504
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 framework 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.
Subjects:dynamic private provision of public goods
dynamic common-pool problems
dynamic hold-up problems
incomplete contracts
renegotiation design
climate change and climate agreements
JEL:D86
H87
Q54
F53
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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