Complementarity (Not Substitution) between Natural and Produced Capital: Evidence from the Panama Canal Expansion

Mani Rouhi Rad, Wiktor Adamowicz, Alicia Entem, Eli P. Fenichel and Patrick Lloyd-Smith

Journal of the Association of Environmental and Resource Economists, 2021, vol. 8, issue 6, 1115 - 1146

Abstract: Natural capital, and its substitutability with other forms of capital, occupies the heart of the sustainability debate. The existing theoretical and empirical literature in natural capital focuses on the static notions of substitutability and complementarity between natural capital and other forms of capital. We investigate the substitution or complementarity of natural capital stocks with other capital stocks in the forward-looking, firm production setting. We distinguish between the capital space and the services space and argue that stocks may be complements (substitutes) while flows are substitutes (complements). We show that the substitution or complementarity relationship depends on the nature of the investment, which may be unclear ex ante. We apply the approach to analyze the relationship between produced capital and natural capital in the case of the Panama Canal expansion and provide empirical evidence of complementarities between natural capital and produced capital.

Date: 2021
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