Abstract:
This article presents a sequential decision approach to study investments in environmentally dirty and clean technologies. We develop two models and compare the results to check for robustness. After showing how the system can converge to lock-in into an undesirable dirty technology, we examine the effects of recombinant
innovation of the existing technologies. A mechanism of endogenous competition is described involving a positive externality of increasing returns to investment. Increasing returns are counterbalanced by recombinant innovation, which is a force characterized by a negative or positive externality depending on the dynamics of the system. We find conditions in which lock-in can be avoided or escaped. Finally we study the symmetry breaking of an environmental policy that charges pollution. We evaluate if and how an economy locked to a dirty technology can be unlocked and move towards the clean technology, also comparing the cumulative pollution output of different scenarios.