Commitment-Based Equilibrium Environmental Strategies Under Time-Dependent Absorption Efficiency

Fouad El Ouardighi (), Konstantin Kogan, Giorgio Gnecco and Marcello Sanguineti
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Fouad El Ouardighi: ESSEC Business School
Konstantin Kogan: Bar-Ilan University
Giorgio Gnecco: IMT School for Advanced Studies
Marcello Sanguineti: University of Genova

Group Decision and Negotiation, 2018, vol. 27, issue 2, No 5, 235-249

Abstract: Abstract This paper investigates how current and future generations are affected by commitment-based Nash equilibrium environmental strategies when the environmental absorption efficiency is susceptible to switch from a pollution sink to a source. We formulate a two-player differential game model of transboundary pollution that includes the environmental absorption efficiency as a state variable that can be enhanced thanks to restoration efforts. Based on a logarithmic specification for the instantaneous revenue function, we characterize the cooperative solution and the commitment-based Nash equilibrium strategy, and examine their differences in terms of steady state and transient behavior. We notably show that a commitment-based Nash equilibrium strategy makes it possible to prevent a definitive switching of the environmental absorption efficiency from a pollution sink to a source but imposes greater economic sacrifices on current generations than on future generations. In comparison, the cooperative solution imposes greater sacrifices on current generations in terms of revenues but it imposes lower environmental costs on both current and future generations than commitment-based Nash equilibrium strategy.

Keywords: Transboundary pollution; Environmental absorption efficiency; Cooperative solution; Commitment-based strategies (search for similar items in EconPapers)
JEL-codes: C72 Q57 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10726-017-9545-7

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