Cournot Competition and â€œGreenâ€ Innovation: An Inverted-U Relationship
We examine the relationship between competition and innovation in an industry where production is polluting and R&D aims to reduce emissions (â€œgreenâ€ innovation). We present an n-firm oligopoly where firms compete in quantities and decide their investment in â€œgreenâ€ R&D. When environmental taxation is exogenous, aggregate R&D investment always increases with the number of firms in the industry. Next we analyse the case where the emission tax is set endogenously by a regulator (committed or time-consistent) with the aim to maximize social welfare. We show that an inverted-U relationship exists between aggregate R&D and industry size under reasonable conditions, and is driven by the presence of R&D spillovers.
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