Non-linear incentive equilibrium strategies for a transboundary pollution differential game

Abstract

In this paper we apply non-linear incentive strategies to sustain over time an agreement. We illustrate the use of these strategies in a linear-quadratic transboundary pollution differential game. The incentive strategies are constructed in such a way that in the long run the pollution stock (the state variable) is close to the steady state of the pollution stock under the cooperative mode of play. The non-linear incentive functions depend on the emission rates (control variables) of both players and on the current value of the pollution stock. The credibility of the incentive equilibrium strategies is analyzed and the performance of open-loop and feedback incentive strategies is compared in their role of helping to sustain an agreement over time. We present numerical experiments to illustrate the results.