Strategic Behavior and the Environment > Vol 4 > Issue 1

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

Slim Ben Youssef, Manouba University, ESC de Tunis, LAREQUAD, Tunisia, , Georges Zaccour, Chair in Game Theory and Management, HEC Montréal, Canada,
Suggested Citation
Slim Ben Youssef and Georges Zaccour (2014), "Absorptive Capacity, R+D Spillovers, Emissions Taxes and R+D Subsidies", Strategic Behavior and the Environment: Vol. 4: No. 1, pp 41-58.

Publication Date: 22 Apr 2014
© 2014 Ben Youssef and G. Zaccour
Environmental Economics,  Industrial Organization,  Public Economics,  Economic Theory,  Regulation
Pollution controlinventive R&Dabsorptive capacitytaxes and subsidiesfirst best


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In this article:
1. Introduction 
2. The Model 
3. Firms' Behavior 
4. The Socially Optimal Regulatory Instruments 
5. Conclusion 


In this paper, we consider a duopoly competing on 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. To reach the first best outcome, the regulator uses three instruments, namely, a per-unit emissions tax, a per-unit inventive-research subsidy, and a per-unit absorptive-research subsidy. The socially optimal investment cost in inventive R&D is always higher than that in absorptive R&D. Interestingly, when the free spillover is high enough, the regulator gives a greater per-unit subsidy for inventive research, and when it is low enough and the marginal damage cost of pollution is sufficiently high, the regulator 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.