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Optimal firm behavior under environmental constraints

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  • Raouf, BOUCEKKINE

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Natali, HRITONENKO
  • Yuri, YATSENKO

Abstract

The paper examines the Porter and induced-innovation hypotheses in a firm model where : (i) the firm has a vintage capital technology with two complementary factors, energy and capital; (ii) scrapping is endogenous; (iii) technological progress is energy-saving and endogenous trough purposive R&D investment; (iv) the innovation rate increases with R&D investment and decreases with complexity; (v) the firm is subject to emission quotas which put an upper bound on its energy consumption at any date; (vi) energy and capital prices are exogenous. Balanced growth paths are first characterized, and a comparative static analysis is performed to study a kind of long-term Porter and induced-innovation hypotheses. In particular, it is shown that tighter emission quotas do not prevent firms to grow in the long-run, thanks to endogenous innovation, but they have an inverse effect on the growth rate of profits. Some short-term dynamics are also produced, particularly, to analyze the role of initial conditions and energy prices in optimal firm behavior subject to environmental regulation. Among numerous results, we show that (i) firms which are historically “small” polluters find it optimal to massively pollute in the short run : during the transition, new and clean machines will co-exist with old and dirty machines in the productive sectors, implying an unambiguously dirty transition; (ii) higher energy prices induce a shorter lifetime for capital goods but they depress investment in both new capital and R&D, featuring a kind of reverse Hicksian mechanism.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2008017.

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Length: 52
Date of creation: 01 Jun 2008
Date of revision:
Handle: RePEc:ctl:louvec:2008017

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Keywords: matching problem; von Neumann-Morgenstern stable sets; farsighted stability;

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References

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  1. Xepapadeas, A. & Zeeuw, A.J. de, 1998. "Environmental Policy and Competitiveness: The Porter Hypothesis and the Composition of Capital," Discussion Paper 1998-38, Tilburg University, Center for Economic Research.
  2. Richard G. Newell & Adam B. Jaffe & Robert N. Stavins, 1999. "The Induced Innovation Hypothesis And Energy-Saving Technological Change," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 941-975, August.
  3. Feichtinger, Gustav & Hartl, Richard F. & Kort, Peter M. & Veliov, Vladimir M., 2006. "Capital accumulation under technological progress and learning: A vintage capital approach," European Journal of Operational Research, Elsevier, vol. 172(1), pages 293-310, July.
  4. Raouf, BOUCEKKINE & José R. , RUIZ-TAMARIT, 2004. "Special functions for the study of economic dynamics : The case of the Lucas-Uzawa model," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004026, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Hart, Rob, 2004. "Growth, environment and innovation--a model with production vintages and environmentally oriented research," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1078-1098, November.
  6. Raouf Boucekkine & Marc Germain & Omar Licandro, . "Replacement echoes in the vintage capital growth model," Working Papers 96-16, FEDEA.
  7. Feichtinger, G. & Hartl, R.F. & Kort, P.M. & Veliov, V., 2005. "Environmental policy, the Porter hypothesis and the composition of capital: Effects of learning and technological progress," Open Access publications from Tilburg University urn:nbn:nl:ui:12-170753, Tilburg University.
  8. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation for Research in Economics, Yale University.
  9. Carraro, Carlo & Siniscaico, Domenico, 1994. "Environmental policy reconsidered: The role of technological innovation," European Economic Review, Elsevier, vol. 38(3-4), pages 545-554, April.
  10. Chimeli, Ariaster B. & Braden, John B., 2005. "Total factor productivity and the environmental Kuznets curve," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 366-380, March.
  11. BOUCEKKINE, Raouf & DE LA CROIX, David & LICANDRO, Omar, 2006. "Vintage capital," CORE Discussion Papers 2006024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
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Cited by:
  1. YATSENKO, Yuri & BOUCEKKINE, Raouf & HRITONENKO, Natali, 2008. "Estimating the dynamics of R&D-based growth models," CORE Discussion Papers 2008052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Boucekkine, Raouf & Hritonenko, Natali & Yatsenko, Yuri, 2011. "Scarcity, regulation and endogenous technical progress," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 186-199, March.
  3. Azomahou, Théophile & Boucekkine, Raouf & Nguyen-Van, Phu, 2008. "Promoting clean technologies: The energy market structure crucially matters," MERIT Working Papers 032, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  4. Brechet, Thierry & HRITONENKO, Natali & YATSENKO, Yuri, 2010. "Adaptation and mitigation in long-term climate policies," CORE Discussion Papers 2010065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Théophile T. Azomahou & Raouf Boucekkine & Phu Nguyen-Vanc, 2009. "Promoting clean technologies under imperfect competition," Working Papers 2009_06, Business School - Economics, University of Glasgow.

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