Abstract
A watershed consists of more than two regions intending to apply ecological compensation to solve the transboundary pollution problems. For this purpose, we develop a differential game model to investigate each region's optimal strategy and show the following main conclusions: (1) There is a set of optimal ecological compensation rates that improve the welfare of each region and produce Pareto improvement results. (2) Ecological compensation shifts partial pollution reduction investments from downstream to upstream regions and increases total reduction investments in the basin. (3) Ecological compensation improves the water ecosystem and increases each region's yield and income level.
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