Absorptive Capacity, R&D Spillovers, Emissions Taxes and R&D Subsidies

Ben Youssef, Slim and Zaccour, Georges (2009): Absorptive Capacity, R&D Spillovers, Emissions Taxes and R&D Subsidies. Unpublished.

Abstract

In this paper, we consider a duopoly competing in quantity, where firms can invest in R&D to control their emissions. We distinguish between efforts carried out to acquire first-hand knowledge (inventive R&D) and efforts made to develop an absorptive capacity to be able to capture part of the knowledge developed by the rival. There are also free R&D spillovers between firms. We show that a regulator can reach the first best by using three regulatory instruments, which are a per-unit emissions tax, a per-unit inventive-research subsidy and a per-unit absorptive-research subsidy. The socially optimal R&D level for inventive research is higher than the one for absorptive capacity, even when the investment-cost parameters for inventive and absorptive research are equal and when there is both very little free spillover and a very high learning parameter. Interestingly, when the free spillover is high enough, the regulator gives a greater per-unit subsidy to inventive research, and when it is low enough and the marginal damage cost of pollution is sufficiently high, he supports absorptive research to strengthen R&D spillovers. Moreover, inventive research is actually taxed when the free spillover is low and the marginal damage cost of pollution is high.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pollution Control; Inventive R&D; Absorptive Capacity; Taxes and Subsidies; First Best.
• Subjects: D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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