Working Paper: CEPR ID: DP525
Authors: Carlo Carraro; Domenico Siniscalco
Abstract: We consider one polluting industry in an open economy. The national government implements a policy of industrial pollution control by inducing appropriate technological innovations to reduce toxic emissions. The emission-reducing innovations are developed through firm-specific costly investments. Under different hypotheses on market structure (perfect competition, Bertrand and Cournot oligopoly) international competition forces the national government to subsidize innovation. The appropriate subsidy scheme varies according to market structure and to the information available to the government. If information is asymmetric, the subsidy must include an information premium to separate different types of firms.
Keywords: Environmental Innovation; International Competition; Subsidies; Asymmetric Information; Self Selection
JEL Codes: 026; 411; 722
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government subsidies (H23) | Firms' investment in emission-reducing technologies (Q52) |
| International competition (Z28) | Government must subsidize emission-reducing innovations (Q55) |
| Government subsidies (H23) | Negative profits for domestic firms (without subsidies) (F23) |
| Market structure (D49) | Optimal subsidy (H21) |
| Asymmetric information (D82) | Subsidy must include self-selection mechanism (H23) |
| International coordination on environmental policies (F64) | Need for subsidies diminishes (H23) |