Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) Jacek B. KRAWCZYK (UNIVERSITY OF WELLINGTON, School of Economics and Finance) Thomas VALLEE (UNIVERSITY OF NANTES, Department of Economics)
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We study a trade-off between economic and environmental indicators using a two-stage optimal control setting where the player can switch to a cleaner technology, that is environmentally ÒefficientÓ, but economically less productive. We provide an analytical characterization of the solution paths for the case where the considered utility functions are increasing and strictly concave with respect to consumption and decreasing linearly with respect to the pollution stock. In this context, an isolated player will either immediately start using the environmentally efficient technology, or for ever continue applying the old and ÒdirtyÓ technology. In a two-player (say, two neighbor countries) dynamic game wheer the pollution results from a sum of two consumptions, we prove existence of a Nash (open-loop) equiibrium, in which each player chooses the technoloy selfish i.e., without considering the choice made by the other player. A Stackelberg game solution displays the same properties. Under cooperation, the country reluctant to adopt the technology as an equilibrium solution, chooses to switch to the cleaner technology provided it benefits from some ÒtransferÓ from the environmentally efficient partner
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