Market Structure and Environmental Innovation

This paper studies ...rms’ incentives to invest in environmental R&D under different market structures (Cournot and Bertrand) and environmental policy instruments (emission standards, taxes, tradeable permits and auctioned permits). Because of market strategic e¤ects, R&D incentives vary widely across market structures and instruments. For example, when ...rms’ products are strategic substitutes (i.e., Cournot), either emission standards, taxes or auctioned permits can provide the most incentives. But when ...rms’ products are strategic complements, either taxes or auctioned permits provide the most incentives. If markets are perfectly competitive, however, permits and emission standards o¤er similar incentives that ¤Professor of Economics at the Department of Economics of the Catholic University of Chile, Research Associate at the Center for Energy and Environmental Policy Research (CEEPR) of MIT; and Visiting Professor of Applied Economics at the Sloan School of Management of MIT. Any correspondence should be sent to: One Amherst Street, MIT Room E40-279, Cambridge, MA 02139, USA. Phone 1–617253-3551, fax 1–617-253-9845, e-mail [email protected]: I have bene...ted from discussions with Denny Ellerman and Richard Schmalensee and from comments of an anonymous referee. Financial support was provided by CEEPR-MIT and Fondecyt-Chile grant no. 1990100.