The Impact of Innovation on a Polluting Firm's Regulation Driven Decision to Upgrade its Capital Stock

RIT Economics Department Working Paper No. 08-06

25 Pages Posted: 21 May 2008

See all articles by Amitrajeet A. Batabyal

Amitrajeet A. Batabyal

Rochester Institute of Technology

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

The extant literature has paid scant theoretical attention to the tripartite interaction between increasing environmental regulations, the resulting decision by a polluting firm to upgrade its capital stock, and the impact of innovation on this capital stock improvement decision. Hence, we theoretically analyze this tripartite interaction when the polluting firm faces adjustment costs to upgrade its capital stock. First, we construct a dynamic model of regulation driven investment by a polluting firm. Second, we specify the conditions characterizing efficient investment. Third, we study the impact of an unanticipated increase in innovation on the polluting firm's steady state capital stock. Fourth, we analyze the impact of an anticipated increase in innovation on the polluting firm's steady state capital stock. Finally, we discuss the relationship between the polluting firm's internal shadow price of capital and the stock market value of a unit of this firm's capital.

Keywords: Capital Stock, Dynamics, Innovation, Investment, Polluting Firm

JEL Classification: D210, Q550, R380

Suggested Citation

Batabyal, Amitrajeet A. and Nijkamp, Peter, The Impact of Innovation on a Polluting Firm's Regulation Driven Decision to Upgrade its Capital Stock (May 2008). RIT Economics Department Working Paper No. 08-06, Available at SSRN: https://ssrn.com/abstract=1134871 or http://dx.doi.org/10.2139/ssrn.1134871

Amitrajeet A. Batabyal (Contact Author)

Rochester Institute of Technology ( email )

Department of Economics, RIT
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Rochester, NY NEW YORK 14623-5604
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HOME PAGE: http://people.rit.edu/aabgsh

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446091 (Phone)
+31 20 4445611 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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