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Environmental Innovation, War Of Attrition And Investment Grants

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Author Info

  • CESARE DOSI

    ()
    (Department of Economics, University of Padova, via del santo 33, 35100 Padova, Italy)

  • MICHELE MORETTO

    ()
    (Department of Economics, University of Padova and Fondazione ENI Enrico Mattei, Italy)

Abstract

The paper analyses the timing of spontaneous environmental innovation when second-mover advantages, arising from the expectation of declining investment costs, increase the option value of waiting created by investment irreversibility and uncertainty about private payoffs. We then focus on the design of public subsidies aimed at bridging the gap between the spontaneous time of technological change and the socially desirable one. Under network externalities and incomplete information about firms' switching costs, auctioning investment grants appears to be a cost-effective way of accelerating pollution abatement, in that it allows targeting grants instead of subsidizing the entire industry indiscriminately.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.

Volume (Year): 12 (2010)
Issue (Month): 01 ()
Pages: 37-59

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Handle: RePEc:wsi:igtrxx:v:12:y:2010:i:01:p:37-59

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Related research

Keywords: Environmental innovation; investment irreversibility; network externalities; investment grants; second-price auction; Q28; O38;

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References

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  1. Mason, Robin & Weeds, Helen, 2001. "Irreversible Investment with Strategic Interactions," CEPR Discussion Papers 3013, C.E.P.R. Discussion Papers.
  2. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  3. Moretto, Michele, 2000. "Irreversible investment with uncertainty and strategic behavior," Economic Modelling, Elsevier, vol. 17(4), pages 589-617, December.
  4. Paul Klemperer & Jeremy Bulow, 1997. "The Generalized War of Attrition," Economics Series Working Papers 1998-W01, University of Oxford, Department of Economics.
  5. Mauer, David C. & Ott, Steven H., 1995. "Investment under Uncertainty: The Case of Replacement Investment Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 581-605, December.
  6. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  7. Cesare Dosi & Michele Moretto, 1997. "Pollution Accumulation and Firm Incentives to Accelerate Technological Change Under Uncertain Private Benefits," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 10(3), pages 285-300, October.
  8. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
  9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  10. Bliss, Christopher & Nalebuff, Barry, 1984. "Dragon-slaying and ballroom dancing: The private supply of a public good," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 1-12, November.
  11. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  12. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  13. Cesare Dosi & Michèle Moretto, 1998. "Auctioning green investment grants as a means of accelerating environmental innovation," Revue d'Économie Industrielle, Programme National Persée, vol. 83(1), pages 99-110.
  14. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
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Cited by:
  1. Ben Youssef, Slim, 2010. "Timing of adoption of clean technologies by regulated monopolies," MPRA Paper 42470, University Library of Munich, Germany, revised Sep 2012.
  2. Ben Jebli, Mehdi & Ben Youssef, Slim, 2013. "Timing of adoption of clean technologies, transboundary pollution and international trade," Economics Discussion Papers 2013-50, Kiel Institute for the World Economy.
  3. Michele Moretto, 2007. "Competition and Irreversible Investments under Uncertainty," "Marco Fanno" Working Papers 0058, Dipartimento di Scienze Economiche "Marco Fanno".
  4. Paolo M. Panteghini & Michele Moretto, 2007. "Preemption, Start-Up Decisions and the Firms' Capital Structure," Economics Bulletin, AccessEcon, vol. 4(39), pages 1-14.
  5. Massimiliano Mazzanti & Roberto Zoboli, 2006. "Examining the Factors Influencing Environmental Innovations," Working Papers 2006.20, Fondazione Eni Enrico Mattei.
  6. Du Bois, Rodrigo Salcedo & Macias, Miguel Angel Gutierrez, 2013. "Cooperation makes it happen? Groundwater management in Aguascalientes, Mexico: An experimental approach," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151139, Agricultural and Applied Economics Association.
  7. repec:ebl:ecbull:v:4:y:2007:i:39:p:1-14 is not listed on IDEAS

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