Abstract: The market failure of river basin environmental management is the root cause of externality. The government-led ecological compensation mechanism can internalize the external effects of river basin environmental governance and is an effective means to solve the watershed environmental issues.
The cross-border mobility of the basin's environment makes the environmental quality in the upper reaches of the basin directly affect the downstream areas.When the upstream region excessively uses environmental resources in pursuit of greater economic interests and transfers the cost of pollution control and environmental protection in the river basin to the downstream, it will cause dissatisfaction in the downstream regions.Conversely, in the absence of appropriate compensation, the protection of the environment in the upper reaches of the region may lose the opportunity to develop and use the environment, which will lead to weakening the will of the upper reaches of the environmental protection.As an economic incentive method, the ecological compensation mechanism internalizes the external effects of ecological protection in the river basin.The ecological compensation mechanism coordinates the upstream and downstream economic interests of the river basin in a way that the beneficiaries pay a certain fee to the disadvantaged.
Because of the conflicts of interest between economic development and environmental protection, the ecological compensation in the upper and lower reaches of the catchment has a typical game feature.Based on the differential game model, the impact of ecological compensation mechanism on the government's pollution control efforts is studied. The effect of basin ecological compensation mechanism is analyzed by comparing the game equilibrium in three cases.
The non-cooperative game is used to describe the game of upstream and downstream governments in the basin without ecological compensation, and stackelberg game is used to describe the game between upstream and downstream governments in ecological compensation.Whether it is a non-cooperative game or a master-slave game, basins and local governments are all aiming at maximizing their utility, instead of maximizing the overall utility of the basin.For the purpose of comparative analysis, the central government intervention was introduced to analyze the local government's decision to maximize the overall revenue of the basin.Then, the equilibrium solutions for the upper and lower government decisions under the three scenarios and the optimal returns for the upstream and downstream governments under the equilibrium solution conditions are solved.
The results show that the non-cooperation mode of the upstream governments and downstream governments is not desirable when solving the problem of river basin environmental governance. Central intervention can effectively improve overall benefits of the basin. However, it will greatly stimulate upstream government pollution control efforts that downstream government provideenough large ecological compensation for upstream government.
Based on this, it is argued that we should improve the compensation mechanism of fiscal transfer payment combined with vertical and horizontal, establish the incentive mechanism of ecological compensation between upstream governments and downstream governments in bounded watershed, and select appropriate river basin ecological compensation mode according to local conditions.

Key words: basin ecological compensation mechanism, government-led, differential game theory