Policy Diffusion in a simple Stackelberg Game

Strategic environmental policy games are usually based on simultaneous decision making and reach the conclusion that the policy choices are strategic substitutes. Empirical evidence, however, shows that the introduction of a regulatory instrument usually follows a consecutive pattern that is best described as policy diffusion. To introduce policy diffusion into to a strategic environmental policy game we transform the typical model setup into a Stackelberg game in which we analyze the policy decisions of two governments when one can commit to its choice. We find that the well-known trade-off between rent-seeking and the internalisation of negative externalities from pollution is mitigated when policy diffusion takes place.