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Environmental Regulation and Industry Dynamics

  • Aditi Sengupta

    ()

    (SMU)

We examine the effect of more stringent environmental regulation on the dynamic structure of a deterministic competitive industry with endogenous entry and exit where firms invest in reduction of their future compliance cost. The level of regulation is exogenously fixed and constant over time. The compliance cost of a firm at each point of time depends on its current output, its accumulated past investment and the level of regulation. We outline sufficient conditions under which industries with more stringent regulation are associated with higher investment in compliance cost reduction and higher shake-out of firms over time; the opposite may be true under certain circumstances. Our analysis indicates that the effect of a change in regulation on market structure may be lagged over time.

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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0903.

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Length: 24 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:smu:ecowpa:0903
Contact details of provider: Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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  1. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Working Paper Series rwp00-002, Harvard University, John F. Kennedy School of Government.
  2. Sajal Lahiri & Yoshiyasu Ono, 2007. "Relative Emission Standard versus Tax under Oligopoly: The Role of Free Entry," Journal of Economics, Springer, vol. 91(2), pages 107-128, June.
  3. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  4. Stavins, Robert, 2004. "Environmental Economics," Discussion Papers dp-04-54, Resources For the Future.
  5. Boyan Jovanovic & Glenn MacDonald, 1993. "The Life-Cycle of a Competitive Industry," NBER Working Papers 4441, National Bureau of Economic Research, Inc.
  6. Kohn, Robert E., 1997. "The effect of emission taxes and abatement subsidies on market structure: Comment," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 617-628, August.
  7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  8. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  9. Shaffer, Sherrill, 1995. "Optimal Linear Taxation of Polluting Oligopolists," Journal of Regulatory Economics, Springer, vol. 7(1), pages 85-100, January.
  10. Conrad, Klaus & Wang, Jianmin, 1993. "The effect of emission taxes and abatement subsidies on market structure," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 499-518.
  11. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
  12. Lee, Sang-Ho, 1999. "Optimal Taxation for Polluting Oligopolists with Endogenous Market Structure," Journal of Regulatory Economics, Springer, vol. 15(3), pages 293-308, May.
  13. Farzin, Y H, 2003. "The Effects of Emissions Standards on Industry," Journal of Regulatory Economics, Springer, vol. 24(3), pages 315-27, November.
  14. Hugo A. Hopenhayn, 1993. "The shakeout," Economics Working Papers 33, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Petrakis, Emmanuel & Roy, Santanu, 1999. "Cost-Reducing Investment, Competition, and Industry Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 381-401, May.
  16. Daniel L. Millimet & Santanu Roy & Aditi Sengupta, 2009. "Environmental Regulations and Economic Activity: Influence on Market Structure," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 99-118, 09.
  17. Hopenhayn, Hugo A., 1992. "Exit, selection, and the value of firms," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 621-653.
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