Federal Acid Rain Games
Journal of Urban Economics
Federal environmental policy, designed to control acid rain, is shaped after the hierarchy of the system, and is controlled simultaneously by regional and central governments. Each governmental level controls one of two policy instruments: pollution abatement production and pollution tax. In a two-stage game where regional governments are Stackelberg leaders and control pollution taxes, the subgame perfect equilibrium is socially efficient. But, the subgame perfect equilibrium for a two-stage game where the central government is the Stackelberg leader and controls pollution taxes is inefficient; it corresponds to the Nash equilibrium for a game where regional governments control both policy instruments.
Caplan, Arthur J., and Emilson C.D. Silva. (1999) "Federal Acid Rain Games." Journal of Urban Economics, 46(1), 25-52.