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General Institutional Equilibrium
- theory and policy implications

Mid-Term Report Summary - GINE (General Institutional Equilibrium<br/>- theory and policy implications)

The GInE project applies and develops contract theory to study (stage 1) the optimal or equilibrium design of institutions such as international agreements; (stage 2) how contracts with institutions (such as a local government) should best be designed by an external party (such as a donor); (stage 3) how multiple institutions are optimally designed in response to each other, ultimately leading to a general institutional equilibrium.
So far, the outcomes of the projects are the following.

Stage 1 - subproject A:
Together with PhD student Torben Mideksa, we have a working paper studying how a donor should design a contract (to reduce deforestation) as a function of the institutional setting in the recipient country. We are in particular showing that the contract is quite different if there are multiple jurisdictions in the country or not, and it depends on whether deforestation is driven by crime or the government’s sale of logging concessions.

Stage 2 - subproject B:
This part is particularly concerned with the optimal institutional design of environmental treaties. In one paper (with Marco Battaglini), accepted in Journal of Political Economy, we show that so-called incomplete contracts (where the environmental agreement specifies emission levels, but not investments in R&D) are better than so-called complete contracts (where also R&D are specified), since the coalition in the former case is larger, in equilibrium. This contrasts the view typically held among both politicians and economists.
In addition, the PI and his collaborators have in total six other papers related to the optimal design of institutions. Four of them are concerned with international environmental agreements. One is joint by the PI and GInE-participant Alessia Russo. Alessia Russo has also written two other papers related to subproject B. GInE participant Paolo Piacquadio has published two papers related to subproject B.

Stage 2 - subproject C.
This subproject has led to a working paper on the dynamic game between the West (interested in conserving) and the South (preferring conservation if and only if the West pays or is likely to pay in the near future). I show that there is no equilibrium where the forest will be conserved with probability one, even if this is known to be socially optimal.

Stage 3 - subproject E.
Stage 3 aims at analyzing how multiple institutions interact and are endogenous at the same time.The PI and Steve Callander have analyzed how two jurisdictions decide on local policies and whether to experiment with their policies. Since such experimentation leads to lessons and knowledge also useful for the neighbor, there may be free-riding and too little experimentation in equilibrium. However, districts will try to mitigate free-ride by selecting experiments that are not very useful for the neighbor. We compare this game to a centralized institutional setting. Even though centralization is suboptimal ex post, it may create a kind of tournament between the districts, inducing each of them to experiment more and with policies also useful for the neighbor.