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.