Abstract
Significant amounts of public spending are allocated towards research on climate change, but considerable uncertainties remain. We analyze the strategic role of information acquisition and the determinants of investments in information in a common pool game. In the first stage, countries can acquire a signal about their own environmental damages caused by total emissions. Because signals are public, there are information spillovers between countries. In the second stage, the countries decide how much pollution to emit. We show that there can be an inefficiently high amount of investments in information in the non-cooperative equilibrium compared to the cooperative solution if the countries are risk averse and the expected emissions are sufficiently large. In addition, we analyze what happens if the countries cooperate in one of the stages but not in the other. We show numerically that if the emissions are decided non-cooperatively, countries might agree not to acquire any information at all. But if the emissions levels are decided cooperatively, investments in the non-cooperative equilibrium are always too low.
Highlights
Considerable uncertainties surround the extent of environmental damages caused by common pool emissions
We identified the degree of inefficiency in the pollution stage and the countries’ risk aversion as important determinants of investments in research
We compared the non-cooperative equilibrium to the cooperative solution
Summary
Considerable uncertainties surround the extent of environmental damages caused by common pool emissions. Our main result is to show analytically that there can be more investment in the non-cooperative equilibrium than in the cooperative solution even when the correlation between the countries damages is perfect This happens when the pollution stage is sufficiently inefficient in terms of expected emissions (i.e. private benefits from polluting activities are high) and when countries are sufficiently risk averse. Our numerical results suggest that, given high enough risk aversion, low correlation in damages can lead to relatively larger investments in the non-cooperative equilibrium than in the cooperative solution This is explained by the non-cooperative countries’ aversion to being the country with less information: the country with higher degree of uncertainty emits less than the more certain country.
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