The study looks at how countries and other decision makers behave in long-term strategic situations, such as climate policy, where decisions today affect the future. Economists model these situations as differential games, in which several players continuously adjust their choices over time.

A central concept in this work is the Markov-perfect equilibrium. In such an equilibrium, each player chooses the best possible Markovian action strategy, given the strategy choices of the other players. Such a strategy conditions the actions of a player on the current state of the world. The article resolves a long-standing technical problem in the analysis of these equilibria and provides clear conditions for when they exist and how to find them.

Potential for better outcomes

The authors apply their framework to a standard model of international climate policy, where treaties cannot be enforced. Treaties based on Markov-perfect equilibria are, however, self-enforceable, as no player has an incentive to break them. The article shows that there is not just a single outcome, but a whole set of possible equilibria, and implied equilibrium paths, that countries might follow. Some of these lead to much better outcomes for global welfare than the linear benchmark strategy that earlier research focused on. This changes the perspective on climate policy, which is usually seen as a dynamic prisoner's dilemma, where, by pursuing their own interests, players are trapped in an inefficient outcome. In the light of the work of Jaakkola and Wagener, international negotiations can now be understood as coordination games, where the main task is to coordinate on one of the efficient equilibria. Self-interest and efficient outcomes are thus not seen to be contradictory in a dynamic context.