Abatement technology innovation, worker productivity and firm profitability: A dynamic analysis

Abstract

Based on the empirical evidence that improving environmental quality can raise worker productivity, this paper develops a dynamic analysis model to investigate the relationship between abatement technology innovation, worker productivity, and firm profitability in a Cournot competitive market. The main characteristic of this study is that we assume that (1) abatement technology innovation can boost firm profitability by increasing worker productivity; (2) each firm's abatement technology is an endogenous variable, whose state dynamic equation is linear and has an exogenous decay rate of abatement technology; and (3) emissions taxes and the wage rates are exogenous parameters. Our main results show that, first, the system admits a unique saddle-point equilibrium under firm decisions and government regulations, respectively. Second, under firm decisions, the output level (price) monotonically decreases (increases) in the abatement technology, whereas an increase in the rate of emissions taxes leads to an increase (decrease) in firm profitability (worker productivity). Furthermore, under government regulations, a negative relationship exists between output (price) and abatement technology; worker productivity is positively related to improvement in abatement technology (product market competition). Finally, government regulations are better than firm decisions for promoting abatement technology, worker productivity, output levels, and firm profitability.