The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference

Davide Dragone, Luca Lambertini () and Arsen Palestini ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: 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 environmental taxation. We take a dynamic approach to this issue, using a simple differential game to show that the conclusion reached by the static literature is not robust, as the introduction of dynamics shows that firms do invest in R&D for environmental-friendly technologies throughout the game, as long as R&D is accompanied by an output restriction exhibiting a distinctively collusive flavour. We also examine the social planning case and the effects of Pigouvian taxation, to show that there exists a feasible tax rate inducing profit-seeking firms to choose a combination of output and R&D such that the resulting social welfare level is the same as in the first best.

Keywords: pollution; environmental externality; R&D; differential games; social planning (search for similar items in EconPapers)
JEL-codes: H23 L13 O31 Q55 (search for similar items in EconPapers)
Date: 2009-01
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Citations: View citations in EconPapers (4)

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http://www.rcea.org/RePEc/pdf/wp21_09.pdf

Related works:
Chapter: The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference (2013)
Working Paper: The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:21_09

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