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Optimal growth when environmental quality is a research asset

  • Groth, Christian
  • Ricci, Francesco

We advance an original assumption whereby a good state of the environment positively affects labor productivity in R&D such that deteriorating environmental quality negatively impacts R&D. We study the implications of this assumption for the optimal solution in an R&D-based model of growth, where the use of a non-renewable resource generates pollution. We show that in such a case, it is socially optimal to postpone extraction, as opposed to the situation in which the environment has no effect on productivity in R&D. Furthermore, insofar as environmental quality declines and subsequently recovers, we find that it is optimal to re-allocate employment to R&D in line with productivity changes. If environmental quality recovers only partially from pollution, R&D effort optimally begins above its long-run level, then progressively declines to a minimum and eventually increases to its steady-state level.

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Paper provided by LERNA, University of Toulouse in its series LERNA Working Papers with number 10.27.333.

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Date of creation: Dec 2010
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Handle: RePEc:ler:wpaper:10.27.333
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