Abstract
I analyze whether self-enforcing international technological agreements to develop and adopt a breakthrough technology can greatly improve aggregate welfare if an international market for the technology is created. I assume that the technology is a private international good and countries can form two international consortiums: (1) a producing consortium that chooses whether to develop, adopt and sell the technology and (2) a consuming consortium that chooses whether to buy and adopt the technology. The ownership of the technology allows the creation of a market system that can solve the free-rider problem. I show that if the producing consortium has the bargaining power, the technology can always be developed and fully adopted and all gains from cooperation can be realized. If the bargaining power is shared between the consortiums, the aggregate welfare greatly improves and the technology can almost be fully adopted when the gains are sufficiently large.
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Notes
The Lima Climate Conference succeeded in reaching a commitment from nearly 200 nations to reduce their fossil fuel emissions. However, the Lima Accord does not include legally binding requirements on emissions cuts. Instead, each nation agreed to enact domestic laws to reduce emissions and put forth a plan laying out how much each one will cut after 2020.
Davenport, C. (Dec. 15, 2014). A Climate Accord Based on Global Peer Pressure. New York Times, p. A3. http://www.nytimes.com/2014/12/15/world/americas/lima-climate-deal.html
Surprisingly, breakthrough technologies, also called radical innovations, are not defined with precision in the literature. The concept of breakthrough technologies has its origins in Schumpeter’s (1939) distinction between incremental and radical innovations. In general, breakthrough technologies are commonly characterized using one or more of the following attributes: (1) technologies based on totally different science or engineering principles; (2) technologies that represent a major price-performance improvement over existing technologies and (3) technologies that create a major disruption in the marketplace, rendering established firms’ knowledge, technologies, and production techniques obsolete In the IEA literature, Carbon Capture and Storage (CCS), solar energy, industrial air capture, among others, are considered good candidates to become breakthrough technologies (see, e.g., Barrett 2006, 2010; Golombek and Hoel 2009; Hoel and de Zeeuw 2010).
Barrett (2006) assumes, as is common in the IEA literature, that only one coalition among countries is possible.
The producing consortium can be conceptualized as being composed of countries with comparative advantage in R&D while the consuming consortium can be conceptualized as being composed of countries with lower technological development.
The Carbon Sequestration Leadership Forum (CSLF) is an example of an international technological agreement. The CSLF focuses on the development of CCS technologies. The CSLF is currently comprised of 25 members, including 24 countries and the European Commission. Membership is open to national governmental entities that have a commitment to investing resources in research, development and demonstration activities related to CCS technologies. http://www.cslforum.org/aboutus/index.html
The International Atomic Energy Agency is another example of international technological cooperation. Beyond its task in verification of the Treaty on the Non-Proliferation of Nuclear Weapons, it promotes collaborative research in the application of nuclear technologies for sustainable development and offers technical cooperation.
Furthermore, the international community recognizes the need to create new institutions and mechanisms that facilitates international technological cooperation (e.g., OECD 2012). For example, the International Energy Agency has established a range of multilateral energy technology initiatives in various areas such as energy efficiency, fossil fuels, fusion power and renewable energy technologies from 1975. Since the 1990s focus has been on energy savings, GHG emissions, climate change, technology transfer and renewable energies (IEA 2010).
In a cooperation problem, the strategy profile in which countries cooperate perfectly is not an equilibrium. In contrast, in the coordination problem described by Barrett, the strategy profile in which countries cooperate perfectly generates an equilibrium. In this case, it is easier to design a mechanism such that countries select the perfect cooperative outcome. For example Barrett (2006) recommends that countries sign an agreement that enters into effect only if it is ratified by a determined number of countries. This mechanism solves the coordination problem.
The importance of property rights can be observed in the current negotiations of the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) agreements (see: http://www.ustr.gov/trade-agreements/free-trade-agreements). For a discussion about the importance of TRIPS in recent free trade initiatives see Roffe et al. 2010.
The complete results of the model using the “old” technology as a reference point are available by email request.
In contrast, Hoel and de Zeeuw (2010) assume that the cost of adopting the breakthrough technology is decreasing with respect to the aggregate level of investment in R&D.
It is assumed in the IEA literature that countries are capable of forming coalitions, whenever it is collectively rational for them to do so. The problem is that usually, when there are large gains from cooperation, the free-riding incentives are so strong that it is not possible to form large, stable coalitions, and thus the gains from cooperation cannot be realized (see Barrett 1994, 2005).
Since it is not rational for any country to individually adopt Y, a consuming consortium needs at least two members to be feasible.
Notice that this game also has asymmetric equilibria, in which members of the producing consortium do not make equal contributions in R&D. I will not analyze asymmetric equilibria here.
Note that the term “collectively rational”, which we will be using often, means that the rationality constraint for forming a consortium is satisfied, but it does not mean that the consortium is stable. The stability conditions for the consortium have yet to be evaluated.
It is necessary to differentiate between two types of payoffs associated with the consuming consortium: (1) total payoff, \(V_{A} ^{i}(k_{A})\) and, (2) partial payoff, \(V_{Ap}^{i}(k_{A}).\) The latter measures how much members of the consuming consortium obtains due to the use of Y, without considering the payoffs they obtain by the actions taken by members of the producing consortium.
In a previous version of this paper, I analyzed the case where (3) holds and an international market for Y can be created. I obtained the following two results: i) If \(b(N+\frac{1}{N-1})-c\frac{N}{(N-1)}\le \frac{\overline{M} }{(N-1)},\) a unique, stable producing consortium of size \(N\) can always be formed for whom it is collectively rational to develop and adopt Y; ii) if \(b(N+\frac{1}{N-1})-c\frac{N}{(N-1)}\ge \frac{\overline{M}}{(N-1)}\), it is rational and stable for a country to develop Y alone and a unique, stable consuming consortium of size \(N-1\) can always be formed for whom it is collectively rational to buy Y and there is full adoption of Y.
Note that even if we consider that \(p<0\) is feasible, setting a negative price can never be an optimal strategy for the producing consortium. If the producing consortium is willing to pay outsiders to adopt the technology, these would not be willing to form a consuming consortium. Not belonging to any consortium would allow the outsiders to obtain the technology for free, in addition to a subsidy.
Note that if \(p=0,\) the technology becomes an international public good and the creation of an international market for it would be irrelevant. This is the case described by Barrett (2006).
If \(p_{N-k_{R}}^{*}>\frac{\overline{M}}{N},\) then \(-Nb_{y}(N-k_{R})<-\overline{M}-Nc_{y}\) and given that \(\frac{\partial V_{R}^{i}(k_{R})}{\partial k_{R}}=\frac{b_{y}(N-k_{R})[-N-k_{R}]+Nc_{y} +\overline{M}}{k_{R}^{2}}.\) Therefore, if \(p_{N-k_{R}}^{*}>\frac{\overline{M}}{N},\) \(\frac{dV_{R}^{i}(k_{R})}{dk_{R}}<0.\) Thus \(V_{R} ^{i}(k_{R})\) is a strictly decreasing and \(V_{A}^{i}(N-k_{R})\) is a strictly increasing function of \(k_{R},\) for \(k_{R}\in [1,{\widetilde{k}}_{R}]\).
This game has an additional equilibrium if \(p_{2}^{*}=2b-c>\frac{\overline{M}}{N}.\) However, \(A2\) states \(b-c<0\) and given that we expect \(\overline{M}\) to be large, this case is not relevant. Nonetheless, I characterize the equilibrium: if \(\frac{\overline{M}}{N}<p_{2}^{*}\), a unique, stable producing consortium of size \(N-1\) can always be formed for whom it is collectively rational to develop and adopt Y and the outsider does not adopt Y.
Since \(\frac{\overline{M}}{N}\approx b(N-\overline{k}_{R})-c,\) I assume that the price is set at \(\frac{\overline{M}}{2N}\) instead of \(\frac{b(N-\overline{k}_{R})-c}{2}\) to simplify the analysis.
\(k_{A}^{\circ }\) is the smallest integer at least as large as \(\frac{\overline{M}}{2bN}+\frac{c}{b}.\) To simplify the analysis in what follows I assume \(k_{A}^{\circ }=\frac{c}{b}-\frac{\overline{M} }{2bN}.\)
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I thank M. Scott Taylor, Joanne Roberts, an anonymous referee and the editor for helpful comments.
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Zavaleta, A. Climate Change and Breakthrough Technologies: The Role of Markets. Environ Resource Econ 64, 597–617 (2016). https://doi.org/10.1007/s10640-015-9889-x
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DOI: https://doi.org/10.1007/s10640-015-9889-x