Abstract
This paper develops a two-region (North and South) dynamic model in which regional stocks of effective labor are negatively influenced by the global stock of pollution. By characterizing the equilibrium strategy of each region we show that the regions’ best responses can be strategic complements through a dynamic complementarity effect. The model is then used to analyze the impact of adaptation assistance from North to South. It is shown that North’s unilateral assistance to South (thus enhancing South’s adaptation capacity) can facilitate pollution mitigation in both regions, especially when the assistance is targeted at labor protection. Pollution might increase in the short run, but in the long run the level of pollution will decline. The adaptation assistance we propose is incentive compatible and Pareto improving.
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