A Differential Game of Environmental R&D under International Oligopolistic Competition

Abstract

The purpose of this paper is to investigate the dynamic properties of environmental R&D and environmental policies by analyzing the infinite horizon differential game between two governments. In this paper, we formulate the differential games that need to be solved by the two governments and derive and characterize the unique open-loop and Markov-perfect Nash equilibrium solutions. By comparing the two equilibrium solutions, we explore the free-riding behavior of governments with regard to pollution control. We derive and compare the steady-state levels of emission tax, pollution stock and social welfare. In addition, we derive the convergence speed of pollution control under the respective equilibrium solutions. In conclusion, compared to the Markov-perfect Nash equilibrium solution, we obtain a higher emission tax, a lower pollution stock, a higher social welfare and a slower pace of pollution control under the open-loop Nash equilibrium solution.

JEL classification: F18, L13, Q58