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Corporate environmental protection under uncertainty

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Abstract

Investment in pollution prevention technologies are often made under significant uncertainty about the future pay-off from the investments. However, as time passes some of the uncertainties may be resolved by new information, implying that the timing of investments becomes an important issue for the company. This paper focuses on uncertainty about a future environmental tax, and shows, within a two period model, that a specific tax uncertainty, standing alone, does not create any incentives for early investments. However, introducing a market share increase linked to the investment, the tax uncertainty may strengthen the incentives for early investments.

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  • Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:355
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    File URL: https://www.ssb.no/a/publikasjoner/pdf/DP/dp355.pdf
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    1. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, "undated". "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
    2. Shameek Konar & Mark A. Cohen, 2001. "Does The Market Value Environmental Performance?," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 281-289, May.
    3. Khanna, Madhu, 2001. " Non-mandatory Approaches to Environmental Protection," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 291-324, July.
    4. Hamilton James T., 1995. "Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 98-113, January.
    5. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
    6. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
    7. Hansen, Lars Gårn, 1997. "Environmental Regulation through Voluntary Agreements," MPRA Paper 47537, University Library of Munich, Germany, revised 1999.
    8. Lanoie, Paul & Laplante, Benoit & Roy, Maite, 1997. "Can capital markets create incentives for pollution control?," Policy Research Working Paper Series 1753, The World Bank.
    9. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
    10. Paul Lanoie & Benoit Laplante & Maité Roy, 1997. "Can Capital Markets Create Incentives for Pollution Control?," CIRANO Working Papers 97s-05, CIRANO.
    11. Cormier, Denis & Magnan, Michel & Morard, Bernard, 1993. "The impact of corporate pollution on market valuation: some empirical evidence," Ecological Economics, Elsevier, vol. 8(2), pages 135-155, October.
    12. Robert D. Klassen & Curtis P. McLaughlin, 1996. "The Impact of Environmental Management on Firm Performance," Management Science, INFORMS, vol. 42(8), pages 1199-1214, August.
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    Keywords

    Uncertainty; Irreversibility; Environmental management; Tax uncertainty; Option value;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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