Participation and Duration of Environmental Agreements (PDF)

We analyze participation in international environmental agreements (IEAs) in a dynamic game where
countries pollute and invest in green technologies. If complete contracts are feasible, participants eliminate
the hold-up problem associated with their investments; however, most countries prefer to free-ride
rather than participate. If investments are non-contractible, countries face a hold-up problem every time
they negotiate; but the free-rider problem can be mitigated and significant participation is feasible. Participation
becomes attractive because only large coalitions commit to long-term agreements that circumvent
the hold-up problem. Under well-specified conditions even the first-best outcome is possible when the
contract is incomplete. Since real-world IEAs fit in the incomplete contracting environment, our theory
may help explaining the rising importance of IEAs and how they should be designed.

Key words: Free-riding, dynamic games, incomplete contracts, coalitions, climate policy