Optimal Firm Behavior under Environmental Constraints

Raouf Boucekkine (), Natali Hritonenko and Yuri Yatsenko

Working Papers from Business School - Economics, University of Glasgow

Abstract: The paper examines the Porter and induced-innovation hypotheses in a firm model where: (i) the firm has a vintage capital technology with two complementary factors, energy and capital ; (ii) scrapping is endogenous; (iii) technological progress is energy-saving and endogenous through purposive R&D investment; (iv) the innovation rate increases with R&D investment and decreases with complexity; (v) the firm is subject to emission quotas which put an upper bound on its energy consumption at any date; (vi) energy and capital prices are exogenous. Balanced growth paths are first characterized, and a comparative static analysis is performed to study a kind of long-term Porter and induced-innovation hypotheses. In particular, it is shown that tighter emission quotas do not prevent firms to grow in the long-run, thanks to endogenous innovation, but they have an inverse effect on the growth rate of profits. Some short-term dynamics are also produced, particularly, to analyze the role of initial conditions and energy prices in optimal firm behaviour subject to environmental regulation. Among numerous results, we show that (i) firms which are historically “small” polluters find it optimal to massively pollute in the short run: during the transition, new and clean machines will co-exist with old and dirty machines in the productive sectors, implying an unambiguously dirty transition; (ii) higher energy prices induce a shorter lifetime for capital goods but they depress investment in both new capital and R&D, featuring a kind of reverse Hicksian mechanism.

Keywords: Vintage capital; R&D; Emission quotas; Porter hypothesis; Induced innovation hypothesis; Optimization (search for similar items in EconPapers)
JEL-codes: C61 D21 D92 Q55 Q56 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Optimal firm behavior under environmental constraints (2008)
Working Paper: Optimal firm behavior under environmental constraints (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2008_11

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