Investment in Cleaner Technologies in a Transboundary Pollution Dynamic Game: A Numerical Investigation

Abstract

Within a noncooperative transboundary pollution dynamic game, we study the strategic impact of a region’s investment in the adoption of a cleaner technology, as embodied by a reduction in the emission per output ratio, on the equilibrium outcomes and regions’ welfare. The ratio of emissions to output is endogenous and is a decreasing function of the level of the stock of cleaner technology. Each region can invest in a cleaner technology in addition to its control of emissions. Cleaner technology is assumed to be public knowledge so that both regions benefit from the investment in this technology of an individual region. Pollution damage is modeled as a strictly convex function in the pollution stock.We analyze the feedback equilibrium of the noncooperative game between two regions played over an infinite horizon. The formulation of the transboundary pollution dynamic game does not fit any special structure of analytically tractable games such as linear-state or linear-quadratic differential games. We use numerical methods to characterize the feedback equilibrium of the noncooperative game. The equilibrium trajectories of the stocks of pollution and cleaner technology as well the regions’ welfare are compared under different scenarios.