This work studies the strategic impact of a region's investment in adaptation measures on the equilibrium outcomes of a transboundary pollution dynamic game played in finite horizon. We incorporate adaptation as a region-specific capital stock that decreases local damages and study the feedback (subgame perfect) equilibrium of the non-cooperative game between two regions. In order to discern the impact of adaptation, we compare the equilibrium solutions of three scenarios, which differ in the regions' ability to invest in adaptation measures. The results show that investing in adaptation gives regions an incentive to increase their emissions, which causes an inverse strategic response in the other region. The anticipation of a rise in pollution makes the other region respond by cutting its emissions and investing more in adaptation. The equilibrium trajectories of the stocks of pollution and adaptation capital follow the highest path over time when both regions adapt. When there is an asymmetry between regions in their adaptation capabilities, the region that does not (or cannot) adapt becomes worse off due to lower emissions and higher damages, while the adapting region finishes the game better off than the no-adaptation case.
Published September 2017 , 24 pages