Environmental Regulation and Technological Innovation with Spillovers

Samiran Banerjee and João Gata

No 2004/16, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: We present a two-period dynamic model of standard setting under asymmetric information to model the attempts by the Califormia Air Resources Board (CARB) in getting car manufacturers to comply with its phase-in of stringent emissions standards. After CARB chooses an initial emissions standard that ?rms are required to comply with, automakers respond by choosing R&D investment and production levels which provide CARB an imperfect signal whether they are more or less capable of complying with the standard. CARB resets the environmental standard and the ?rms once again choose research and production levels. Firms are Cournot duopolists in the product market and can choose to do research noncooperatively or cooperatively in the presence of spillovers. We show that ?rms will behave strategically and underinvest in research both under competitive and cooperative R&D, though the level of underinvestment — the ratchet effect — is greater under cooperative R&D when spillovers are large. We uncover a fundamental con?ict between the incentives of ?rms to do cooperative research and social welfare: that ?rms will want to engage in cooperative (resp. noncooperative) R&D only when spillovers are low (resp. high) while social welfare is greater under noncooperative (resp. cooperative) research.

Keywords: Car emissions; dynamic technology-forcing regulation; selfregulation; pre-commitment; cooperative R&D; ratchet effect. (search for similar items in EconPapers)
JEL-codes: L5 O3 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ene, nep-env, nep-ino, nep-mic and nep-reg
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