Environmental regulations and innovation activity in UK manufacturing industries

We examine the relationship between environmental regulations and innovation, using data from UK manufacturing industry during 2000-2006. We estimate a dynamic model of innovation behaviour, and explicitly account for the likely endogeneity of our measure of the stringency of environmental regulations (pollution abatement costs). Our results indicate that while on the one hand environmental R&D and investment in environmental capital are stimulated by greater pollution abatement pressures, on the other hand there is not a positive impact of environmental regulation on total R&D or total capital accumulation. We find some evidence that this is because more stringent environmental regulations directly lower the optimal expenditure on non-environmental innovations. In addition, we find that environmental R&D may crowd out non-environmental R&D, although there is no evidence that environmental capital crowds out non-environmental capital.     

Does Environmental Policy Necessarily Discourage Growth?

This paper analyzes the long-run impact of an environmental policy on economic growth. A growth model with vertical innovation is modified by including intermediate goods as a source of pollution. Taxation on pollution reduces profits of intermediate firms as well as final outputs. However, it increases their mark-ups and alleviates profit losses. In this setting, profit losses are offset by the general equilibrium effect; thus, the tax enhances R&Ds which drive economic growth while it reduces pollution. If the government provides an R&D subsidy, the growth rate will be accelerated.     

Environmental Policy with Endogenous Technology from a Game Theoretic Perspective: The Case of the US Pulp and Paper Industry

The merits of different types of regulatory tools in eliminating pollution and at the same time inducing innovation have long been an interest of researchers in both environmental economics and industrial organization. Although there is a substantial theoretical literature investigating the potential for various environmental policies to attain these dual goals, this is a challenging empirical problem because every industry has its own inherent characteristics that play an important role in determining the performance of different regulatory tools. The majority of the work to date focuses on pollution abatement while leaving pollution prevention understudied. In most of the literature firms are also assumed to be symmetric. Asymmetries among firms add another degree and level of complexity to their strategic interactions, and affect the performance of different regulatory tools. This paper investigates the performance of two alternative regulatory tools, an emissions performance standard and an emissions tax, in reducing pollution and inducing pollution prevention and abatement R&D in the US pulp and paper industry. We construct a model representing the industry in an asymmetric Cournot duopoly framework, calibrate the model to disaggregated industry data, and run scenarios to replicate the behavior of the firms in an imperfectly competitive output market. Our results suggest that pollution prevention R&D can respond quite differently than abatement R&D to different policy instruments. The results indicate that R&D spillovers among firms play crucial role in technology development and strategies of the firms. Our results also suggest that strategic interactions between firms in an imperfectly competitive industry can have significant impacts of the levels of both types of R&D.      

Short-run and long-run effects of capital taxation on innovation and economic growth

In this study, we examine the effects of capital taxation on innovation and economic growth in an R&D-based growth model. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the short run, the consumption effect dominates the tax-shifting effect causing an initial negative effect of capital taxation on the equilibrium growth rates. However, in the long run, the tax-shifting effect becomes the dominant force yielding an overall positive effect of capital taxation on steady-state economic growth. These contrasting effects of capital taxation at different time horizons may provide a theoretical explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

Optimal growth when environmental quality is a research asset

We advance an original assumption whereby a good state of the environment positively affects labor productivity in R&D such that deteriorating environmental quality negatively impacts R&D. We study the implications of this assumption for the optimal solution in an R&D-based model of growth, where the use of a non-renewable resource generates pollution. We show that in such a case, it is socially optimal to postpone extraction, as opposed to the situation in which the environment has no effect on productivity in R&D. Furthermore, insofar as environmental quality declines and subsequently recovers, we find that it is optimal to re-allocate employment to R&D in line with productivity changes. If environmental quality recovers only partially from pollution, R&D effort optimally begins above its long-run level, then progressively declines to a minimum and eventually increases to its steady-state level.     

Dynamic analysis of bribery firms’ environmental tax evasion in an emissions trading market

Using an R&D-based growth model with dual regulation, we analyse how environmental policies influence pollution, corruption, a growth rate, and welfare. Considering that polluting firms bribe bureaucrats to evade paying environmental tax, we find that a stricter environmental tax leads to a decrease in growth rate via a decrease in the permit rent as well as an increase in pollution and corruption per firm and results in worsening households’ welfare and in improving the bureaucrats’ welfare. Thus, tax evasion with corruption improves households’ welfare and worsens the bureaucrats’ welfare. Our findings imply that tax evasion under dual regulation improves social welfare.     

Donations in a recursive dynamic model

Abstract.  This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household's income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations.     

Pollution,Private Investment in Healthcare,and Environmental Policy*

In this paper, we demonstrate that, in a two‐period overlapping‐generations model, the relationship between environmental taxation and economic activity (output level and growth) has an inverted‐U shape when we take into account the detrimental impact of pollution on health and the individual decision of each working‐age agent to improve her health. We also demonstrate that the link between environmental tax and lifetime welfare also has an inverted‐U shape, and that a tighter environmental policy might enhance economic activity while reducing steady‐state lifetime welfare. Finally, we investigate the social optimum and the determinants of the optimal environmental tax.     

Strategic environmental policy and the accumulation of knowledge

In dealing with a transnational pollutant-emitting duopoly welfare-maximising policy makers face two negative externalities: imperfect competition and unpriced emissions. Strategic environmental policy models show that these externalities involve a trade-off between reducing pollution and allowing for rent-seeking of the respective firm. This dilemma usually results in a suboptimal internalisation of the negative externality emerging from emissions. Indeed, the conventional model setup includes an R&D stage that enables the firms to mitigate regulation costs. But the typical one period configuration ignores that R&D expenditures create knowledge capital which is, due to its inherent cumulativeness, also effective in following periods. Our model analyses the established trade-off in a two period setting and therefore allows for an investigation of intertemporal knowledge accumulation. We find that the intertemporal effects provide an incentive for a policy maker to set a higher tax rate compared to a one-period setup which lessens the magnitude of the suboptimal internalisation of emissions. Under certain conditions even a tax rate above the Pigouvian level is possible in period 1.     

Research & development and growth: A Bayesian model averaging analysis

We examine the effect of research and development (R&D) on long-term economic growth using the Bayesian model averaging (BMA) to deal rigorously with model uncertainty. Previous empirical studies, which applied BMA, investigated the effect of dozens of regressors on long-term growth, but they did not examine the effect of R&D due to data unavailability. We extend these studies by proposing to capture the investment in R&D by the number of Nobel prizes in science. Using our indicator, the estimates show that R&D exerts a positive effect on long-term growth. This result is robust to many different parameter and model prior structures as well as to alternative definitions of R&D indicator.     

Environmental Tax Reform and Growth: Income Tax Cuts or Profits Tax Reduction

This study investigates how recycling revenues, which are generated by environmental taxes, affect growth through different types of tax cuts. A growth model with creative destruction (Aghion and Howitt Econometrica 60(2):323–351,1992, Aghion and Howitt The economics of growth, 2009) is modified to include the production of final output as a source of pollution. This paper demonstrates that introducing an environmental tax, accompanied by either an income tax cut or a profits tax reduction, increases the output growth rate. The analysis also shows that, if technological change is resulted from deliberate activities of economic agents, the reduction of the profits tax rate for an intermediate monopolist is more growth-enhancing than an income tax cut since a profits tax reduction directly promotes R&D activities.     

Information disclosure, banking development and knowledge-driven growth

In this study we develop a knowledge-driven growth model which explicitly models the banking sector as monopolistically competitive. The main mechanism through which financial intermediaries affect the real economy is through the evaluation and provision of liquidity to R&D projects. We distinguish two scenarios. In the regime with information disclosure, banks are able to use the stock of information obtained by the banking industry from evaluating R&D projects. This information externality brings about efficiency improvements, thereby leading to a positive entry of banks, more bank-funded research and in turn positive economic growth. By contrast, in the regime with no information disclosure, it is not profitable for new banks to enter the industry. This implies that no more potential R&D projects can be evaluated and hence financed, thus leading the economy to a zero-growth equilibrium.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

Timing and Commitment of Environmental Policy,Adoption of New Technology,and Repercussions on R&;D

We investigate the interplay between environmental policy, incentives to adoptnew technology, and repercussions on R&D. We study a model where a monopolistic upstream firm engages in R&D and sells advanced abatement technology to polluting downstream firms. We consider four different timing and commitment regimes of environmental tax and permit policies: ex post taxation (or issuing permits), interim commitment to a tax rate (a quota of permits) after observing R&D success but before adoption, and finally two types of ex antecommitment before R&D activity, one with a unique tax rate (quota of permits), the other one with a menu of tax rates (permit quotas). We study the second best tax and permit policies and rank these with respect to welfare. In particular, we find that commitment to a menu of tax rate dominates all other policy regimes.     

The Causality Between R&D And Investment

The aim of this paper is to investigate the relationship between R&D expenditure and investment in machinery and equipment in order to test for causality. New growth theory emphasises the role of R&D in creating blueprints needed to produce new capital goods implicitly assuming causality running from R&D to investment. Other recent studies using firm level data have investigated the relationship between innovative activity and investment in fixed capital. In this paper we use aggregate data from the US economy on R&D expenditure in the industrial sector and aggregate investment in machinery and equipment. Standard Granger causality tests, together with the Hsiao version, are then performed, showing that causality runs from R&D to investment. In addition we perform a cointegration analysis allowing a test of possible long-run feedbacks. This dynamic representation shows that any feedback between investment and R&D is only significant in the long run.     

Climate change mitigation options and directed technical change: A decentralized equilibrium analysis

The paper considers an endogenous growth model with climate change as well as three R&D sectors dedicated to energy, CCS (Carbon Capture and Storage) and backstop efficiency. First, we characterize the set of decentralized equilibria: a particular equilibrium is associated with any vector of policy instruments including a carbon tax and a subsidy to each R&D sector. Second, we show that it is possible to express any equilibrium as the solution of a maximization program. Third, we solve the first-best optimum problem and thereby deriving the optimal instruments. Finally, we illustrate the theoretical model using calibrated functional specifications. In particular, we investigate the effects of various combinations of policy instruments (including the optimal ones) by determining the deviation of each corresponding equilibrium from the “laisser-faire” benchmark. We find notably that introducing an R&D subsidy hardly affects emissions when a carbon tax is already implemented, thus revealing a complementary effect between these two policy instruments.     

Capacity investment and green R&D in a dynamic oligopoly under the potential shift in environmental damage

We develop a differential oligopoly game to investigate firms’ capacity investment and green R&D efforts in the presence of the potential shift in environmental damage and under the spillover effect of R&D activities among firms. We find that when both the probability of potential shift in environmental damage and the efficacy of R&D activities are high, the spillover effect will discourage the R&D effort but encourage the capacity investment. Otherwise, the spillover effect will encourage the R&D effort but discourage the capacity investment. Moreover, the potential shift in environmental damage can significantly impact the capacity and green R&D decisions as well as the Pigouvian tax, especially in the case of a large number of firms, a high profitability of the product, a high level of interest rate, and a high level of R&D spillover among firms.     

Environmental regulations,induced R&D,and productivity: Evidence from Taiwan's manufacturing industries

This paper examines whether stringent environmental regulations induce more R&D and promote further productivity in Taiwan. Using an industry-level panel dataset for the 1997–2003 period, empirical results show that pollution abatement fees, a proxy for environmental regulations, is positively related to R&D expenditure, implying that stronger environment protection induces more R&D. On the other hand, pollution abatement capital expenditures do not have a statistically significant influence on R&D. Further evaluation of the influence of induced R&D by environment regulations on industrial productivity shows a significant positive association between them. This finding supports the Porter hypothesis that more stringent environmental regulations may enhance rather than lower industrial competitiveness.     

Environmental regulation and the productivity of Japanese manufacturing industries

This paper attempts to provide empirical evidence on issues concerning: (a) the effect of the stringency of environmental regulations (as measured by pollution control expenditures) on innovative activity (as measured by R&D expenditures) and on the average age of capital stock and (b) the productivity enhancement effect of environmental regulations in Japanese manufacturing industries. The empirical findings in the paper show that the pollution control expenditures have a positive relationship with the R&D expenditures and have a negative relationship with the average age of capital stock. It is also shown that increases in R&D investment stimulated by the regulatory stringency have a significant positive effect on the growth rate of total factor productivity.