DP525 Environmental Innovation Policy and International Competition
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.