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The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference

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  • D. Dragone
  • L. Lambertini
  • A. Palestini

Abstract

The established view on oligopolistic competition with environmental externalities has it that, since firms neglect the external effect, their incentive to invest in R&D for pollution abatement is nil unless they are subject to some form of environmental taxation. We take a dynamic approach to this issue, using a simple differential game to show that the conclusion reached by the static literature is not robust, as the introduction of dynamics shows that firms do invest in R&D for environmental-friendly technologies throughout the game, as long as R&D is accompanied by an output restriction exhibiting a distinctively collusive flavour. We also examine the social planning case and the effects of Pigouvian taxation, to show that there exists a feasible tax rate inducing profit-seeking firms to choose a combination of output and R&D such that the resulting social welfare level is the same as in the first best

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 658.

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Date of creation: Mar 2009
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Handle: RePEc:bol:bodewp:658

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  1. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 2000. "Quality Leadership When Regulatory Standards Are Forthcoming," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 331-48, September.
  2. Bovenberg, A.L. & Mooij, R.A. de, 1997. "Environmental tax reforms and endogenous growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-74434, Tilburg University.
  3. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  4. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
  5. Karp Larry & Livernois John, 1994. "Using Automatic Tax Changes to Control Pollution Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 38-48, July.
  6. C. Lombardini-Riipinen, 2005. "Optimal Tax Policy under Environmental Quality Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(3), pages 317-336, November.
  7. Benchekroun, Hassan & Van Long, Ngo, 2002. "On the multiplicity of efficiency-inducing tax rules," Economics Letters, Elsevier, vol. 76(3), pages 331-336, August.
  8. Damania, D., 1996. "Pollution Taxes and Pollution Abatement in an Oligopoly Supergame," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 323-336, May.
  9. Poyago-Theotoky, J.A., 2007. "The organization of R&D and environmental policy," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 63-75, January.
  10. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
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Cited by:
  1. L. Lambertini & R. Orsini, 2014. "Process Innovation and Product Quality Improvement in a Dynamic Monopoly," Working Papers wp926, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. D. Dragone & L. Lambertini & G. Leitmann & A. Palestini, 2009. "A Stochastic Optimal Control Model of Pollution Abatement," Working Papers 681, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. M. Fadaee, 2011. "A Dynamic Approach to the Environmental Effects of Trade Liberalization," Working Papers wp746, Dipartimento Scienze Economiche, Universita' di Bologna.

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