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Abstract
This dissertation contains two essays on optimal policy design in the presence of political constraints.
The first essay relates to an active debate among economists regarding clean energy subsidies. The models used to inform this debate have a common simplifying assumption: the preferences of the government are kept constant over time. In reality, control of the government often rotates between parties with very different policy preferences. This paper finds that adding turnover in party control of the government can have significant implications. Specifically, the party more concerned about the environment (``the green party") finds it optimal to subsidize irreversible investments in clean energy, even when carbon taxes are available and can be placed at any level. Quantitative evidence suggests that this mechanism can justify the use of relatively large clean energy investment subsidies.
The next essay relates to the design of international climate agreements in a context where countries must be incentivized to voluntarily join the agreement. Existing literature has focused on two possible ways to incentivize participation in a climate agreement: 1. participants can threaten to increase carbon emissions if other countries don't join or 2. participants can threaten to place trade sanctions on countries who don't join. This paper offers a novel justification for using trade sanctions to incentivize participation: if there's a chance that punishments will have to actually be carried out, using trade sanctions is welfare improving because trade sanctions are far more efficient punishments than carbon emissions increases. This argument is formalized using a game with incomplete information. A calibration exercise suggests that using trade sanctions to enforce a climate agreement could significantly increase global welfare.