Environmental policy: The coevolution of pollution and compliance

The paper examines the evolution of firms’ compliance and non-compliance in the context of taxable emissions. Firms can either choose to comply with the emissions standards set by a public authority or violate them. Two different scenarios are analyzed: in one, violations are considered a single option, while in the other, violations vary between low and high emissions. Firms’ behaviors result in different levels of fines if they are discovered to violate the standards. In the context of replicator dynamics, firms can switch strategies according to a proportional rule of strategy evolution. Additionally, firms form beliefs about auditing stringency based on the announced level of pollution or non-compliance. The paper analyzes the steady states achieved by the coevolving system of compliance and pollution, taking into account the number of available strategies and the type of probability. The analysis reveals the existence of both monomorphic and polymorphic steady states, with their properties varying depending on the parameter values.