A Differential Game of Joint Implementation of Environmental Projects

This paper proposes a two-player, finite-horizon differential game model to analyze joint implementation in environmental projects, one of the flexible mechanisms considered in the Kyoto Protocol. Our results show that allowing for foreign investments increases the welfares of both parties involved in the project. Further, imposing an environmental target constraint does not necessarily deteriorate the payoffs of both players. Finally, a leakage effect does occur when foreign investments are possible.