Abstract
The purpose of this paper is to investigate the dynamic properties of environmental R & D and environmental policy by analyzing infinite horizon stochastic differential games between two governments. In this paper, we formulate stochastic differential games that need to be solved by the two governments, and derive and characterize the cooperative and Markov-perfect Nash equilibrium solutions. By comparing the two equilibrium solutions, the free-riding behavior of governments can be explored with regard to pollution control. The steady-state levels of emission tax, pollution stock and value function were also derived and compared. In conclusion, we obtained a higher emission tax, a lower pollution stock, a higher value function under the cooperative solution when compared to the Markov-perfect Nash equilibrium solution.
JEL Classification: F18, L13, Q58
