We consider a two-player asymmetric differential game of pollution control. One player is non-vulnerable to pollution, or unwilling to consider damages when choosing her production policy in a non-cooperative game. We characterize the feedback-Nash equilibrium and the cooperative solution. We establish conditions under which the vulnerable player can buy the cooperation of the non-vulnerable player to control her emissions and invest in abatement activities. We further use the Nash bargaining solution to allocate the total cooperative dividend between the two players and propose a time-consistent decomposition overtime of the total payoff.
Published October 2009 , 20 pages