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Optimal firm behavior under environmental constraints

Author

Listed:
  • BOUCEKKINE, Raouf

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • HRITONENKO, Natali

    ( Prairie View A&M University)

  • YATSENKO, Yuri

    ( Houston Baptist University)

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 through 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.

Suggested Citation

  • BOUCEKKINE, Raouf & HRITONENKO, Natali & YATSENKO, Yuri, 2008. "Optimal firm behavior under environmental constraints," LIDAM Discussion Papers CORE 2008024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2008024
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    Cited by:

    1. 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.
    2. Théophile T. Azomahou & Raouf Boucekkine & Phu Nguyen-Vanc, "undated". "Promoting Clean Technologies: The Energy Market Structure Crucially Matters," Working Papers 2008_13, Business School - Economics, University of Glasgow.
    3. Mikael Linden & Matti Makela & Jussi Uusivuori, 2013. "Fuel Input Substitution under Tradable Carbon Permits System: Evidence from Finnish Energy Plants 2005-2008," The Energy Journal, , vol. 34(2), pages 145-168, April.
    4. Brechet, Thierry & HRITONENKO, Natali & YATSENKO, Yuri, 2010. "Adaptation and mitigation in long-term climate policies," LIDAM Discussion Papers CORE 2010065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Spiritus, Kevin & Lehmann, Etienne & Renes, Sander & Zoutman, Floris T., 2025. "Optimal taxation with multiple incomes and types," Theoretical Economics, Econometric Society, vol. 20(2), May.
    6. Mikael Linden, Matti Makela, and Jussi Uusivuori, 2013. "Fuel Input Substitution under Tradable Carbon Permits System: Evidence from Finnish Energy Plants 2005-2008," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    7. AZOMAHOU, Théophile & BOUCEKKINE, Raouf & NGUYEN-VAN, Phu, 2009. "Promoting clean technologies under imperfect competition," LIDAM Discussion Papers CORE 2009011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. YATSENKO, Yuri & BOUCEKKINE, Raouf & HRITONENKO, Natali, 2008. "Estimating the dynamics of R&D-based growth models," LIDAM Discussion Papers CORE 2008052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Alejandro Caparrós & Richard E. Just & David Zilberman, 2015. "Dynamic Relative Standards versus Emission Taxes in a Putty-Clay Model," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(2), pages 277-308.

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    Keywords

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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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