Environmental and innovation performance in a dynamic impure public good framework

We model investment decisions regarding innovation and emissions abatement in a dynamic theoretical framework, where knowledge stock is considered as an impure public good. The reaction function between one representative agent’s investments in innovation and the other agents’ investments in the public characteristic of the impure public good has positive slope under general conditions and that its sensitiveness is affected by assumptions on the elasticity of substitution in the benefit function as well as on the degree of complementarity between the private and the public characteristic. The positivity of the reaction function is then empirically tested in an econometric estimation. We exploit an original database by gathering innovation efforts as well as emissions over the period 1996-2006 for 15 European countries and 23 manufacturing sectors. Empirical results show that innovation investment is positively driven by the public characteristics provided by other sectors, with different reactivity strength for different polluting emissions.