Capital accumulation subject to pollution control: Open-loop versus feedback investment strategies

In a differential game between two symmetric firms, provided with a clean and a dirty production activity, it is analyzed how investment and emissions are affected by environmental regulation. If both firms face the same environmental policy, a stricter policy reduces long-run investment in the dirty technology, while the effect on the clean one is ambiguous. Long-run emissions of each firm, and consequently total emissions, decrease. This result need not necessarily hold if both firms face different policy instruments: Each firm's investment levels, and consequently also its emissions, increase when its competitor faces a stricter environmental policy.