Two-Stage and Three-Party Transboundary Watershed Management Based on Valuation Adjustment Mechanism (VAM) Agreement

The severe water shortage and pollution problems have become the bottleneck restricting the sustainable development of the economy and society. River basin ecological compensation is an important way to solve transboundary water pollution. To increase the cooperation willingness between governments and enterprises, and clarify the operation mechanism, this paper built a two-stage river basin ecological compensation mechanism in horizontal and vertical directions under VAM agreement. The results show that the externalization of environmental protection costs by the free-riding behavior of governments is the fundamental reason for the failure of the autonomous evolutionary game. The VAM agreement can reduce the uncertainty of upstream and downstream governments in environmental protection expenditure through contract pricing based on water quality, significantly improve free-riding behavior, and make the strategy of maximizing social benefits possible. After signing the VAM agreement, the upstream governments and enterprises become the main players in the second stage of the game, and the game results directly affect the final ownership of the downstream water quality and the ownership of the gambling amount. When the upstream government and enterprises adopt different strategies, by adjusting environmental protection funds and fines, sewage treatment costs, upstream government governance costs and gambling amount, the negative side's strategic choices can be improved. However, when both sides adopt negative strategies, the adjustment of a single variable cannot achieve the optimal stability strategy of maximizing social benefits, and a more comprehensive strategy combination is needed. The research results are expected to provide a reference for the government to formulate environmental policies and promote coordinated basin governance.

Automated summary

The severe water shortage and pollution problems are hindering the sustainable development. River basin ecological compensation is an effective solution for transboundary water pollution. This study proposes a two-stage compensation mechanism under the VAM agreement to enhance cooperation and operational clarity. The results indicate that externalizing environmental costs is the fundamental reason for the failure of autonomous evolutionary game, but the VAM agreement can improve free-riding behavior and maximize social benefits. It is necessary to adopt comprehensive strategies when both sides adopt negative strategies. These findings can guide environmental policy formulation and promote coordinated basin governance.