A cooperative differential game of transboundary industrial pollution between two regions

In recent years, the transboundary pollution problems in the world are becoming more and more serious. The diffusion of pollutants is common, and each region which suffers from the pollution wishes that the polluter in neighboring regions would either reduce polluting or compensate for the damages. This paper studies a cooperative differential game of transboundary industrial pollution between two asymmetric regions. There are two novel features in this paper. First, there is a Stackelberg game between the industrial firms and their local government while the governments can cooperate in pollution reduction. Second, transboundary pollution damages the regions in two ways: through a global accumulative pollutant and a regional non-accumulative pollutant. The paper characterizes the parameter spaces that governments in two neighboring regions can collaborate and gives the feedback Nash equilibrium strategies of governments and industrial firms. It is found that only when the governments get cooperation, the regional impact caused by the neighboring region pollution diffusion could be taken into consideration when the governments develop strategies. Additionally, a payment distribution mechanism is proposed and a subgame-consistent cooperative solution is provided. With such a payment distribution, both governments will receive a higher payoff in a cooperative solution than in a noncooperative solution at any instant of time during the game. (C) 2015 Published by Elsevier Ltd.