This paper analyzes the dynamic interaction between two regions with interconnected river basins. Precipitation is higher in one river-basin while water productivity is higher in the other. Water transfer increases productivity in the recipient basin, but may cause environmental damage in the donor basin. The recipient faces a trade-off between paying the price of the water transfer, or investing in alternative water supplies to achieve a higher usable water capacity. We analyze the design of this transfer using a dynamic modeling approach, which relies on non-cooperative game theory, and compare solutions with different information structure (Nash open-loop, Nash feedback, Stackelberg) with the social optimum. We first assume that the equilibrium between supply and demand determines the optimal transfer price and amount. We show that, contrary to the static case, in a realistic dynamic setting in which the recipient uses a feedback information structure the social optimum will not emerge as the equilibrium solution. We then study different leadership situations in the water market and observe that the transfer amount decreases towards a long-run value lower than the transfer under perfect competition, which in turn lays below the social optimum. In consequence, the water in the donor's river-basin river converges to a better quality in the presence of market power. Finally, we numerically compare our results to the Tagus-Segura water transfer described in Ballestero (2004). Welfare gains are compared for the different scenarios. We show that in all dynamic settings, the longrun transfer amount is lower than in Ballestero's static model. Further, we show that the long-run price settles at a lower level than in Ballestero's model, but is still higher than the average cost-based price determined by the Spanish government.

In this paper we present a Stackelberg differential game to study the dynamic interaction between a polluting firm and a regulator who sets pollution limits overtime. At each time, the firm settles emissions taking into account the fine for non-compliance with the pollution limit, and balances current costs of investments in a capital stock which allows for future emission reductions. We derive two main results. First, we show that the optimal pollution limit decreases as the capital stock increases, while both emissions and the level of noncompliance decrease. Second, we find that offering fine discounts in exchange for firm's capital investment is socially desirable. We numerically obtain the optimal value of such discount, which crucially depends on the severity of the fine. In the limiting scenario with a very large severity of the fine, the optimal discount implies that no penalties are levied, since the firm shows adequate adaptation progress through capital investment.

This paper studies a transboundary pollution problem between two neighbour regions as a dynamic game. These two regions do not only share an environmental problem but they are also engaged in interregional trade. A good produced in one region is traded to the other which uses it as an input. This intermediate good is supplied by the former and demanded by the latter. The supply-demand scheme determines the price and production of the intermediate good. Thus total production is fixed in both regions, and the emissions of pollutants are also determined as a by-product. Cooperation cuts down production and trade, and in consequence the emissions of pollutants. Therefore, the environmental gain from cooperation overcomes the shrink in the interregional trade. An allocation mechanism to share the surplus of cooperation is defined, which guarantees a time-consistent agreement between both regions.

We analyze a general R&D-based endogenous growth model with a growth-essential natural resource. The economy comprises two separate sectors: final output and R&D, both directly or indirectly dependent on the natural resource. Because the resource is exhaustible and it is an essential productive input, increasing returns to scale to man-made inputs are compatible with non-explosive sustained growth. The instability problem usually associated with increasing returns is overcome thanks to the existence of imperfect markets in a decentralized economy.We find an admisible range of values for the elasticity of capital in the R&D sector under which growth is fully endogenous and saddle-path stable with no need of exogenous population growth. * We thank an anonymous reviewer for his/her helpful comments.

This paper analyzes the compliance with social norms optimally established by a benevolent central planner. Since compliance is costly, agents have an incentive to free-ride on others, in a public good game. We distinguish two types of agents: standard pro-self agents (Sanchos) whose payoffs are defined by a prisoner's dilemma game dominated by the non-compliance strategy, and pro-social Quixotes, who still have an incentive to free-ride, although prefer compliance over mutual defection (as in a snowdrift game). Compliance is analyzed in a two-population evolutionary game considering an imitative revision protocol. Individuals from one population play against and imitate agents within their own but also the other population. Inter-population interaction and imitation allow us to investigate under which circumstances some Sanchos might imitate compliant Quixotes, so escaping the non-compliance equilibrium characteristic of an isolated population of Sanchos.Correspondingly, we analyze the conditions under which the interaction with the population of selfish Sanchos increases or decreases the compliance rate among altruistic Quixotes.