The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference
The established view on oligopolistic competition with environmental externalities has it that, since firms neglect the external effect, their incentive to invest in R&D for pollution abatement is nil unless they are subject to some form of environmen
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1 Introduction The enormous amount of data being assembled by the IPCC (Intergovernmental Panel on Climate Change) on the anthropic responsibility in generating (or at least increasing) global warming, and the debate on how to cope with it along the guidelines of the Kyoto Protocol and its follow-ups, are clearly identifying the control of polluting emissions damaging the environment as one of the hottest scientific issues of our times. As such, it is receiving an increasing amount of attention in the current literature in the field of environmental economics, with particular attention to the general equilibrium implications of environmental aspects on trade and growth.1 Most of the existing contributions adopting a partial equilibrium approach investigate the design of optimal Pigouvian taxation aimed at inducing firms to reduce damaging emissions, both in monopoly and oligopoly settings.2 A related stream of
1 On
the optimality of free trade with environmental externalities, see Copeland and Taylor (1994, 2004) and Antweiler et al. (2001). As to the role of environmental issues in growth theory, see Grossman and Krueger (1995), Bovenberg and de Mooij (1997), Bartz and Kelly (2008), Itaya (2008) and Dragone et al. (2010), inter alia.
2 See
Karp and Livernois (1994) and Benchekroun and Long (1998, 2002), inter alia.
D. Dragone (B) · L. Lambertini Department of Economics, University of Bologna, Strada Maggiore 45, Bologna 40125, Italy e-mail: [email protected] L. Lambertini e-mail: [email protected] L. Lambertini ENCORE, University of Amsterdam, Roeterstraat 11, Amsterdam WB1018, The Netherlands A. Palestini MEMOTEF, Sapienza University of Rome, Via del Castro Laurenziano 9, Rome 00161, Italy e-mail: [email protected] J. Crespo Cuaresma et al. (eds.), Green Growth and Sustainable Development, Dynamic Modeling and Econometrics in Economics and Finance 14, DOI 10.1007/978-3-642-34354-4_8, © Springer-Verlag Berlin Heidelberg 2013
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literature examines the incentive for firms to carry out R&D activities in order to introduce environmental-friendly technologies. This of course is very closely related to trade and growth. In particular, a sustainable development will require cheaper and cleaner energy sources and productive technologies than are currently available, to be attained through innovation.3 In static setups, this requires the introduction of some form of taxation/subsidy by the policy maker, in order to induce firms to take into account the presence of the externality, that they would clearly neglect otherwise.4 A third line of research investigates the optimal design of minimum quality standards and/or profit taxation in vertically differentiated industries affected by environmental externalities.5 In the present paper, we take a differential game approach to the investigation of environmentally-oriented R&D efforts in a dynamic Cournot oligopoly model where (at least in the first version of the game) there may not be any tax or subsidy linked to the ext
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