Environmental options and technological innovation: an evolutionary game model

Abstract

This paper analyzes the effects on economic agents’ behavior of an innovative environmental protection mechanism that the public administration of a tourist region may adopt to attract visitors while protecting the environment. On the one hand, the public administration sells to the tourists an environmental call option that gives them the possibility of being (partially or totally) reimbursed if the environmental quality in the region turns out to be unsatisfactory. On the other hand, it offers the firms that adopt an innovative, non-polluting technology an environmental put option that allows them to get a reimbursement for the additional costs imposed by the new technology if the environmental quality is sufficiently good. The aim of the paper is to study the dynamics that arise with this financial mechanism from the interaction between the economic agents and the public administration in an evolutionary game context. The evolution of visitors’ and firms’ behavior is modeled in the paper using the so-called replicator dynamics, according to which a given choice spreads across the population as long as its expected payoff is greater than the average payoff. From the model it emerges that such dynamics may lead either to a welfare-improving attractive Nash equilibrium, in which all firms adopt the environmental-friendly technology, or to a Pareto-dominated equilibrium with no technological innovation and no tourism. As shown in the paper, the attraction basin of the virtuous equilibrium will be maximum if total reimbursement is offered by the public administration to the visitors, and will be minimum if a simple entrance ticket is imposed on the tourists with no chance of reimbursement.