Key Words: Transboundary Pollution, Applied Differential Game, Transfer Payments,

Abstract: An applied differential game theoretic model is developed to compare incentives for wastewater management of upstream and downstream countries under cooperative and noncooperative strategies. The Tijuana River watershed shared by the U.S. and Mexico is the empirical setting for the study. Asymmetry between the countries in terms of costs, damages, and emissions influence the incentives to abate wastewater pollution. In all cases of cooperation with different sharing rules, transfer payments are positive from upstream to downstream lead to reductions in the flow and stock of pollution