FEEM working papers "Note di lavoro" series
2015 .073

Cournot Competition and "Green" Innovation: An Inverted-U Relationship


Authors: Luca Lambertini, Joanna Poyago-Theotoky, Alessandro Tampieri
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: "Green" R&D, R&D Spillovers, Emission Taxation, Time-Consistent Emission Tax, Pre-Commited Emission Tax  
JEL n.: Q55, Q56, O30, L13

Abstract

We examine the relationship between competition and innovation in an industry where production is polluting and R&D aims to reduce emissions ("green" innovation). We present an n-firm oligopoly where firms compete in quantities and decide their investment in "green" R&D. When environmental taxation is exogenous, aggregate R&D investment always increases with the number of firms in the industry. Next we analyse the case where the emission tax is set endogenously by a regulator (committed or time-consistent) with the aim to maximise social welfare. We show that an inverted-U relationship exists between aggregate R&D and industry size under reasonable conditions, and is driven by the presence of R&D spillovers.

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Suggested citation: Lambertini, L., J. Poyago-Theotoky, A. Tampieri, (2015), 'Cournot Competition and "Green" Innovation: An Inverted-U Relationship', Nota di Lavoro 73.2015, Milan, Italy: Fondazione Eni Enrico Mattei.

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