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This paper investigates a Stackelberg differential game between an upstream region and a downstream region for transboundary pollution control and ecological compensation (EC) in a river basin. Among them, the downstream region as the leader chooses its abatement investment level and an ecological compensation rate to encourage upstream investing in water pollution control firstly. After then, the upstream region as the follower determines its abatement investment level to maximize welfare. FFurthermore, we take into consideration the effects of efficiency-improving and cost-reducing learning by doing which are originated from abatement investment activity of both regions simultaneously. The results show the following. (i) There is an optimal ecological compensation rate and under which a Pareto improvement result can be obtained. (ii) Carrying out EC will shift some abatement investment from the downstream region into the upstream region. (iii) The efficiency-improving and cost-reducing learning by doing derived from abatement investment activity of both regions can decrease the optimal ecological compensation rate, increase abatement investment,and improve the social welfare.

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Considering a basin composed of multiple upstream and downstream regions with the pollution occurring across regional boundaries, a Stackelberg game model is developed to investigate the multiple ecological compensation strategies for transboundary pollution control. The results show that (1) under the equilibrium strategy of ecological compensation all regions obtain a Pareto improvement result. (2) Ecological compensation results in an increase in total abatement investment. In particular, a very interesting result is that (3) rising abatement costs in a region compensate more for its upstream regions, whereas its downstream regions do not compensate more for it.

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