Nonlinear Analysis 71 (2009) e952–e959 Contents lists available at ScienceDirect Nonlinear Analysis journal homepage: www.elsevier.com/locate/na Financing the adoption of environment preserving technologies via innovative financial instruments: An evolutionary game approach Angelo Antoci a,∗ , Roberto Dei b , Marcello Galeotti b a University of Sassari, Italy b University of Florence, Italy article info MSC: 34C60 34C07 Keywords: Replicator equations Evolutionary dynamics Environment preserving technologies Financial options abstract The main objective of the paper is to analyze the effects on economic agents’ behavior deriving from the introduction of an environmental protection mechanism that allows the exchange of financial activities among visitors to a region R, firms operating in the region R and the Public Administration. The resulting ‘‘financial market’’ is regulated by the Public Administration, but mainly fuelled by the interests of firms and visitors. The aim of the paper is to study the dynamics that arise in such a financial market from the interaction between the economic agents and the Public Administration. The evolution of visitors and firms’ behavior is modeled using the so-called replicator dynamics, according to which a given choice spreads among the population as long as its expected payoff is greater than the average payoff. From the model it emerges that such a dynamics may lead to a welfare-improving attractive Nash equilibrium in which all firms adopt the environment-friendly technology. © 2009 Elsevier Ltd. All rights reserved. Environmental problems arising from economic activity are going to become a well established research area in economics. Among many suggestions found in economic literature, aimed at rationalizing pollution reduction or other environment protection activities, the most innovative ones concern the introduction of specific financial assets to sustain or integrate the traditional operating of the public sector, as well as to inject market incentives in environmental objectives. The idea underlying the proposals of using bonds or other financial instruments to achieve environmental targets is that the market dynamics guarantees resource allocations that, in general, are more efficient than the allocations resulting from public sector enterprise. The most relevant example of a financial asset that can be issued in accordance with environmental purposes is constituted by the so-called Social Policy Bonds, or Environmental Bonds (EB), introduced by Horesh [1,11,12], Perrings [2] and others. The EB are auctioned by Public Administration (PA) on the open market, but, unlike ordinary bonds, can be redeemed at the face value only if a specified environmental objective has been achieved. They do not bear any interest, and the yield investors can gain depends on the difference between the auctioned price and the face value in the case of redemption. Economic agents involved in the environment objective (either polluters or not), once in possession of the bonds, have a strong interest in operating in such a way that the objective itself is quickly achieved, so as to cash in the expected gains as soon as possible. In our paper we follow a rather different path, proposing two financial activities, issued by the PA of a tourist region (R), which work like contracts between the PA and, separately, visitors and firms operating in R—and can be regarded as (cash- or-nothing) environmental call (EC) and put (EP) options. In fact the financial activity (EP ) offered to potentially polluting firms resembles, under certain aspects, Horesh EB, but differs in other ways (for example, free riding is ruled out by the contract itself between PA and firms). Specifically, the context that we analyze has the following features. ∗ Corresponding address: University of Sassari, Deir, via Torre Tonda 34, 07100 Sassari, Italy. E-mail address: angelo.antoci@virgilio.it (A. Antoci). 0362-546X/$ – see front matter © 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.na.2009.01.077