Angelopoulos, Konstantinos Economides, George Philippopoulos, Apostolis
Year of Publication:
CESifo Working Paper No. 3996
In this paper, we study a two-country dynamic setup with environmental externalities and potential model misspecification in relation to this public good. Under model uncertainty, robust policies help to correct the inefficiencies associated with free riding on public good provision, implying that there are welfare benefits from robust policies even when the fear of model misspecification proves to be unfounded. However, the incentive to free ride on the precautionary policies of the other country may discourage the implementation of robust policies, despite their welfare superiority.