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Complementarity (Not Substitution) between Natural and Produced Capital: Evidence from the Panama Canal Expansion

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  • Mani Rouhi Rad
  • Wiktor (Vic) Adamowicz
  • Alicia Entem
  • Eli P. Fenichel
  • Patrick Lloyd-Smith

Abstract

Natural capital, and its substitutability with other forms of capital, occupies the heart of the sustainability debate. The existing theoretical and empirical literature in natural capital focuses on the static notions of substitutability and complementarity between natural capital and other forms of capital. We investigate the substitution or complementarity of natural capital stocks with other capital stocks in the forward-looking, firm production setting. We distinguish between the capital space and the services space and argue that stocks may be complements (substitutes) while flows are substitutes (complements). We show that the substitution or complementarity relationship depends on the nature of the investment, which may be unclear ex ante. We apply the approach to analyze the relationship between produced capital and natural capital in the case of the Panama Canal expansion and provide empirical evidence of complementarities between natural capital and produced capital.

Suggested Citation

  • Mani Rouhi Rad & Wiktor (Vic) Adamowicz & Alicia Entem & Eli P. Fenichel & Patrick Lloyd-Smith, 2021. "Complementarity (Not Substitution) between Natural and Produced Capital: Evidence from the Panama Canal Expansion," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(6), pages 1115-1146.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/714675
    DOI: 10.1086/714675
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    Cited by:

    1. Kent F. Kovacs & Shelby Rider, 2022. "Estimating the Demand for In Situ Groundwater for Climate Resilience: The Case of the Mississippi River Alluvial Aquifer in Arkansas," NBER Chapters, in: American Agriculture, Water Resources, and Climate Change, pages 367-381, National Bureau of Economic Research, Inc.

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