Interacting innovation investments and environmental performances: a dynamic impure public good model

Abstract

This paper develops a theoretical model to study how investment decisions in innovation taken by a single agent are influenced by environmental externalities produced by investment decisions taken by other agents. The model acts in a dynamic framework, where knowledge stock represents the capital good on which investment decisions over time are taken. Knowledge stock is considered as an impure public good which is responsible for both private and public benefits. We first show that the reaction function between one representative agent’s investments in innovation and the other agents’ investments in the public characteristic of the impure public good has a positive slope under general conditions. We also find that its sensitiveness is affected by the elasticity of substitution in the benefit function as well as by the degree of complementarity between the private and the public characteristics.