Prospect theory in an evolutionary game: Construction of watershed ecological compensation system in Taihu Lake Basin

As an important system to solve cross regional water pollution, watershed ecological compensation has been widely used in the world. However, the existing studies mainly focus on the governments, while ignoring the important role of polluting enterprises in watershed ecological compensation. Thus, the established watershed ecological compensation mechanism is difficult to implement sustainably. Therefore, taking the local governments and polluting enterprises in the watershed as the research object, and studying the change process and influencing factors of their decision-making behavior is of great significance to attract polluting enterprises to join the watershed ecological compensation, and to formulate a sustainable watershed ecological compensation mechanism to solve the cross regional water pollution. Therefore, based on prospect theory and evolutionary game theory, this paper firstly establishes an evolutionary game model between local governments and polluting enterprises in Taihu Lake Basin; secondly, combined with simulation technology, their decision-making behaviors and influencing factors of watershed ecological compensation are studied. The results show that: (1) The initial probabilities will affect their decision-making behaviors; (2) The ecological compensation fee has little influence on the decision-making behaviors of polluting enterprises; (3) The increase of environmental tax rate has significant influence on the local governments’ decision-making behaviors with low initial probabilities; (4) The improvement of supervision ability can promote local governments and polluting enterprises to reach a stable state faster; (5) The marginal decreasing degree of value function has a stronger influence on local governments than on polluting enterprises. This paper can provide suggestions for local governments to build a sustainable watershed ecological compensation mechanism including polluting enterprises, and provide the scientific basis for decision-makers of polluting enterprises whether to join watershed ecological compensation. [Display omitted] •The players will follow the prospect theory to make decisions in the short term, but the expectation theory in the long term.•Initial probabilities will affect decision-making behaviors of players.•Ecological compensation fee has little influence on polluting enterprises.•In the low probabilities, environmental tax rate has significant influence on the local government.•Marginal decreasing degr