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Investment Choice with Polluted Capital

Author

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  • Johanna Etner
  • Pierre A. Jouvet

Abstract

This paper develops a two‐sector overlapping generations model in which one sector produces an externality on the environmental quality and the other has no effect. We assume that environmental quality degradation results from production activity of one sector. Then, we characterise the dynamical system globally and establish sufficient conditions for the global uniqueness of a perfect‐foresight equilibrium path in the case of a Cobb‐Douglas production function and a CES utility function. We show that the existence and the stability of the steady state depend on substitution and income effect and on the degree of pollution.

Suggested Citation

  • Johanna Etner & Pierre A. Jouvet, 2000. "Investment Choice with Polluted Capital," Australian Economic Papers, Wiley Blackwell, vol. 39(4), pages 465-482, December.
    • Handle: RePEc:bla:ausecp:v:39:y:2000:i:4:p:465-482
    DOI: 10.1111/1467-8454.00105
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    Cited by:

    1. Chevallier, Julien & Etner, Johanna & Jouvet, Pierre-André, 2011. "Bankable emission permits under uncertainty and optimal risk-management rules," Research in Economics, Elsevier, vol. 65(4), pages 332-339, December.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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