We study a transboundary pollution problem as a differential game between two regions which are trading each other. A supplier region produced an intermediate good which is traded to a demander region, which uses it as an input. The emissions of pollutants is a by-product of production.Cooperation reduces pollution and improves both regions welfare. Subgame-perfect strategies as threat strategies and an allocation mechanism, ensures a self-enforcing agreement.
Group for Research in Decision Analysis