Abstract
This article presents a model of sequential decisions about investments in environmentally dirty and clean technologies, which extends the path-dependence framework of B. Arthur (1989, Competing technologies, increasing returns, and lock-in by historical events, The Economic Journal, 99, pp. 116–131). This allows us to evaluate if and how an economy locked into a dirty technology can be unlocked and move towards clean technology. The main extension involves the inclusion of the effect of recombinant innovation of the two technologies. A mechanism of endogenous competition is described involving a positive externality of increasing returns to investment which are counterbalanced by recombinant innovation. We determine conditions under which lock-in can be avoided or escaped. A second extension is “symmetry breaking” of the system due to the introduction of an environmental policy that charges a price for polluting. A final extension adds a cost of environmental policy in the form of lower returns on investment implemented through a growth-depressing factor. We compare cumulative pollution under different scenarios, so that we can evaluate the combination of environmental regulation and recombinant innovation.
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