SMU SOE Seminar (Feb 2, 2018, 2-3.30pm): Pledge-and-Review Bargaining

This paper analyzes a bargaining game that is new to the literature, but that is inspired by real-world international negotiations. With so-called pledge-and-review bargaining, as stipulated in the Paris climate agreement, each party submits an intended nationally determined contribution (INDC), quantifying a cut in its own emission level. Thereafter, the set of pledges must be unanimously ratified. The procedure is repeated periodically, as newly developed technology makes earlier pledges obsolete. I first develop a dynamic model of the pledge-and-review game before deriving four main results: (1) If there is some uncertainty on the set of pledges that is acceptable (for example because of unknown discount factors), each equilibrium pledge is approximated by the asymmetric Nash Bargaining Solution. The weights placed on the others payoffs reflect the underlying uncertainty. The weights vary from pledge to pledge, and the set of equilibrium pledges is inefficient. (2) When this result is embedded in a climate change model, I show that each party contributes too little to the public good, the incentive to develop new technology is weak, and the optimal commitment period length is (therefore) long. (3) This result is overturned when each party can decide whether or not to participate: The undemanding pledge-and-review process motivates a larger number of parties to participate. This increases aggregate contributions and technology investments, and the optimal commitment period length is (therefore) short. (4) When the parties can choose between alternative bargaining games in advance, the (broad but shallow) pledge-and-review game is preferred too often (seldom) by technology leaders (laggards), relative to what is socially efficient. The results are consistent with several crucial differences between the climate agreements signed in Kyoto (1997) and Paris (2015) and they rationalize the development from the former to the latter.

Keywords: Dynamic games, Bargaining games, Foundation for the Nash Bargaining Solution, Climate change, The Paris Agreement, Technology.