A cooperative stochastic differential game of transboundary industrial pollution

Though cooperation in environmental control holds out the best promise of effective actions, limited success has been observed because existing multinational joint initiatives fail to satisfy the property of subgame consistency. A cooperative solution is subgame consistent if the solution optimality principle is maintained in any subgame which starts at a later time with any feasible state brought about by prior optimal behaviors. This paper presents a cooperative stochastic differential game of transboundary industrial pollution with two novel features. The first feature is that industrial production creates short-term local impacts and long-term global impacts on the environment. Secondly, a subgame consistent cooperative solution is derived in this stochastic differential game together with a payment distribution mechanism that supports the subgame consistent solution. This is the first time that pollution management is analyzed in a cooperative stochastic differential game framework under these novel features.