Mitigation and adaptation: an informational perspective

Addressing environmental and public health problems requires concerted efforts from both the government and its citizens. The government typically has more information than the citizens do about the severity of a problem, and spillovers of citizens' adaptation efforts complicate that asymmetric information problem. This paper presents a model in which an informed government chooses a mitigation policy and uninformed citizens choose adaptation efforts sequentially and non-cooperatively. We find that mitigation and adaptation either strategically complement each other or are substitutes for each other in equilibrium, depending upon whether the government uses an overly stringent or an overly lax mitigation policy to signal the severe state. We then extend our analysis to a two-nation model in which the pollution or public health problem is transboundary. National governments (in this case, two) then have incentives to free-ride in both their mitigation and their information transmission. We find that information asymmetry may not distort mitigation in this case. Meanwhile, there also exists another refined equilibrium in which one national government pools and relies on the other's stringent policy to signal the severe state.