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The strategic dimension of financing global public goods

Ulrike Kornek and Ottmar Edenhofer ()

European Economic Review, 2020, vol. 127, issue C

Abstract: One challenge in addressing transboundary problems such as climate change is the incentive to free-ride. Transfers from multilateral compensation funds are often used to counteract such incentives, albeit with varying success. We examine how such funds can change the incentive to free-ride in a global public-goods game. In our game, self-interested countries choose their own preferred course, deciding their voluntary public good provision, whether to join a fund that offers compensation for providing the public good and the volume of compensatory payments. We show that (i) total public-good provision is higher when those contributing are given more compensation; and (ii) non-participation in the fund can be punished if the remaining members decrease their public-good provision sufficiently. We then examine three specific fund designs. In the first, the compensation paid to each country is equal to the percentage of above-average total costs for public-goods provision. This design is best able to deter free-riding and can establish the social optimum as the equilibrium. In the second, the compensation paid to each country is a function of the marginal cost of their public-good provision. Here there are significant incentives to free-ride. In the third case, the monetary resources provided by the fund are fixed, a design frequently encountered in international funds. This design is the one least able to deter free-riding.

Keywords: Transfers; Global public goods; International environmental agreements; Climate change (search for similar items in EconPapers)
JEL-codes: C72 F33 H41 Q52 Q54 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.euroecorev.2020.103423

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