'Unconditional Aid and Green Growth'
We study a differential open-loop Stackelberg game between two countries: developed country (leader) and developing country (follower). At any point of time the leader is assumed to have a choice between two strategies: consuming, or giving unconditional aid to the follower; while the follower chooses one of three strategies: consuming, investing in green, or investing in dirty Capitals. We solve numerically for the optimal paths of both players and study how the choice of each player changes with different settings of the game. The steady state analysis for the follower's problem shows that aid has an effect in decreasing the sustainable levels of dirty capital, dirty investments, and the stock of global pollution, while having no effect on the sustainable levels of green capital and green investments. Results also show that the leader decides to give aid temporary only if the follower puts lower weight for the damage from global pollution than the leader does; while the follower decides to consume most of the aid it receives and invests a small share of this aid in green capital.
Lunch will be provided for those attending the seminar.
For more information please contact Joep Lustenhouwer.