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

Abstract

We consider in this paper a duopoly competing in quantities and where …rms can invest in R&D to control their emissions. We distinguish between e¤ort carried out to acquire …rst-hand knowledge (original R&D) and e¤ort to develop an absorptive capacity to be able to capture part of the knowledge developed by rival. There are also free R&D spillovers between …rms. We show that a regulator can reach the social optimal outcome by implementing a taxation and subsidy policy. The regulator subsidizes at a higher rate original R&D e¤ort than its absorptive capacity counterpart when the free spillovers are high, and the contrary may occur when the free spillovers are low. When the cost of original research is lower than the one of absorptive research, or when the learning parameter of the latter is low, then the socially optimal level of original research is higher than the one of absorptive capacity. We have the opposite result when the cost of absorptive capacity is lower than the one of original research and when the learning parameter is high.