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Environmental Regulation and Industry Dynamics

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  • Aditi Sengupta

    ()
    (SMU)

Abstract

We examine the effect of more stringent environmental regulation on the dynamic structure of a deterministic competitive industry with endogenous entry and exit where firms invest in reduction of their future compliance cost. The level of regulation is exogenously fixed and constant over time. The compliance cost of a firm at each point of time depends on its current output, its accumulated past investment and the level of regulation. We outline sufficient conditions under which industries with more stringent regulation are associated with higher investment in compliance cost reduction and higher shake-out of firms over time; the opposite may be true under certain circumstances. Our analysis indicates that the effect of a change in regulation on market structure may be lagged over time.

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File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/2009/SENGUPTA/SENGUPTA-2009-06.pdf
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Bibliographic Info

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0903.

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Length: 24 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:smu:ecowpa:0903

Contact details of provider:
Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

Related research

Keywords: Environmental regulation; Industry dynamics; Investment; Shake-out.;

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References

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  1. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Discussion Papers dp-00-47, Resources For the Future.
  2. Lee, Sang-Ho, 1999. "Optimal Taxation for Polluting Oligopolists with Endogenous Market Structure," Journal of Regulatory Economics, Springer, vol. 15(3), pages 293-308, May.
  3. Stavins, Robert N., 2004. "Environmental Economics," Working paper 276, Regulation2point0.
  4. Farzin, Y H, 2003. "The Effects of Emissions Standards on Industry," Journal of Regulatory Economics, Springer, vol. 24(3), pages 315-27, November.
  5. Jovanovic, B. & MacDonald, G.M., 1992. "The Life-Cycle of Competitive Industry," Papers 92-09, Rochester, Business - Financial Research and Policy Studies.
  6. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  7. Shaffer, Sherrill, 1995. "Optimal Linear Taxation of Polluting Oligopolists," Journal of Regulatory Economics, Springer, vol. 7(1), pages 85-100, January.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  9. Emmanuel Petrakis & Santanu Roy, 1998. "Cost Reducing Investment, Competition and Industry Dynamics," Tinbergen Institute Discussion Papers 98-011/1, Tinbergen Institute.
  10. Hugo A. Hopenhayn, 1993. "The shakeout," Economics Working Papers 33, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Sajal Lahiri & Yoshiyasu Ono, 2007. "Relative Emission Standard versus Tax under Oligopoly: The Role of Free Entry," Journal of Economics, Springer, vol. 91(2), pages 107-128, June.
  12. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
  13. Conrad, Klaus & Wang, Jianmin, 1993. "The effect of emission taxes and abatement subsidies on market structure," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 499-518.
  14. Hopenhayn, Hugo A., 1992. "Exit, selection, and the value of firms," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 621-653.
  15. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  16. Daniel L. Millimet & Santanu Roy & Aditi Sengupta, 2009. "Environmental Regulations and Economic Activity: Influence on Market Structure," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 99-118, 09.
  17. Kohn, Robert E., 1997. "The effect of emission taxes and abatement subsidies on market structure: Comment," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 617-628, August.
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Cited by:
  1. Meredith Fowlie & Mar Reguant & Stephen P. Ryan, 2012. "Market-Based Emissions Regulation and Industry Dynamics," NBER Working Papers 18645, National Bureau of Economic Research, Inc.

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