International Environmental Agreements with mixed strategies and investment

We modify a canonical participation game used to study International Environmental Agreements (IEA), considering both mixed and pure strategies at the participation stage, and including a prior cost-reducing investment stage. The use of mixed strategies at the participation stage reverses a familiar result and also reverses the policy implication of that result: with mixed strategies, equilibrium participation and welfare are higher in equilibria that involve higher investment.

► We look at mixed strategy equilibrium in participation of a canonical IEA game. ► It reinforces a pessimistic result on participation in the literature. ► For sufficiently low abatement costs, the use of mixed strategies overturns that conclusion. ► With pure strategies, investment reducing abatement costs may be counterproductive. ► In contrast, with mixed strategies, investment leads to higher participation and welfare.