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A dynamic game of technology diffusion under emissions trading: an experiment

In: Emissions Trading and Business

Author

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  • Ivana Capozza

    (Unita di Valutazione degli Investmenti Pubblici)

Abstract

In this paper we investigate how the interaction between the product and the emission permit markets may affect firms’ propensity to adopt less polluting technologies in a non perfectly competitive industry. We develop a model of duopoly, in which firms engage in quantity competition in the output market, behave as price takers in the permit market and can switch to a cleaner production technology at some cost. We set up a dynamic game over an infinite horizon in order to investigate firms’ strategic decisions. Technology diffusion is one of the possible stationary equilibria of the game, depending on both the investment cost and the emission cap. We replicate the game in a laboratory experiment. The experimental results suggest that firms’ behaviour will eventually lead to innovation diffusion.

Suggested Citation

  • Ivana Capozza, 2006. "A dynamic game of technology diffusion under emissions trading: an experiment," Springer Books, in: Ralf Antes & Bernd Hansjürgens & Peter Letmathe (ed.), Emissions Trading and Business, pages 53-71, Springer.
    • Handle: RePEc:spr:sprchp:978-3-7908-1748-5_5
    DOI: 10.1007/3-7908-1748-1_5
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