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The Impact of Innovation on a Polluting Firm's Regulation Driven Decision to Upgrade Its Capital Stock

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  • Amitrajeet A. Batabyal

    (Rochester Institute of Technology, Rochester, New York, aabgsh@rit.edu)

  • Peter Nijkamp

    (Free University, Amsterdam, The Netherlands, pnijkamp@feweb.vu.nl)

Abstract

The extant literature has paid scant theoretical attention to the tripartite interaction among increasing environmental regulations, the resulting decision by a polluting firm to upgrade its capital stock, and the impact of innovation on this decision. Hence, the authors theoretically analyze this tripartite interaction when a polluting firm faces adjustment costs to upgrade its capital stock. First, they construct a dynamic model of regulation driven investment by a polluting firm. Second, they specify the conditions characterizing efficient investment. Third, they study the impact of an unanticipated increase in innovation on the polluting firm's steady-state capital stock. Fourth, they analyze the impact of an anticipated increase in innovation on the polluting firm's steady-state capital stock. Finally, the authors discuss the relationship between the polluting firm's internal shadow price of capital and the stock market value of a unit of this firm's capital.

Suggested Citation

  • Amitrajeet A. Batabyal & Peter Nijkamp, 2008. "The Impact of Innovation on a Polluting Firm's Regulation Driven Decision to Upgrade Its Capital Stock," International Regional Science Review, , vol. 31(4), pages 389-403, October.
    • Handle: RePEc:sae:inrsre:v:31:y:2008:i:4:p:389-403
    DOI: 10.1177/0160017608321162
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    References listed on IDEAS

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