Environmental Regulation and Industry Dynamics
Aditi Sengupta
Southern Methodist University
30th January, 2010
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
1 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
size distribution,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
size distribution,
capital formation in …rms,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
size distribution,
capital formation in …rms,
inter-…rm heterogeneity,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
size distribution,
capital formation in …rms,
inter-…rm heterogeneity,
entry-exit, and
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Question
What is the relationship between environmental regulation and
industry dynamics?
How does the increasing stringency of exogenously given
environmental regulation a¤ect:
size distribution,
capital formation in …rms,
inter-…rm heterogeneity,
entry-exit, and
shake-out (“early” exit ) of …rms?
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
2 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
More speci…cally, the e¤ect of the increasing stringency of
environmental regulation on industry dynamics i.e., size distribution,
investment behavior, heterogeneity, and shake-out of …rms.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
More speci…cally, the e¤ect of the increasing stringency of
environmental regulation on industry dynamics i.e., size distribution,
investment behavior, heterogeneity, and shake-out of …rms.
Shows that …rms that exit earlier on the industry equilibrium path
have higher cost of compliance and are smaller in size.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
More speci…cally, the e¤ect of the increasing stringency of
environmental regulation on industry dynamics i.e., size distribution,
investment behavior, heterogeneity, and shake-out of …rms.
Shows that …rms that exit earlier on the industry equilibrium path
have higher cost of compliance and are smaller in size.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
More speci…cally, the e¤ect of the increasing stringency of
environmental regulation on industry dynamics i.e., size distribution,
investment behavior, heterogeneity, and shake-out of …rms.
Shows that …rms that exit earlier on the industry equilibrium path
have higher cost of compliance and are smaller in size.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
the industry experiences higher shake-out, and
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
More speci…cally, the e¤ect of the increasing stringency of
environmental regulation on industry dynamics i.e., size distribution,
investment behavior, heterogeneity, and shake-out of …rms.
Shows that …rms that exit earlier on the industry equilibrium path
have higher cost of compliance and are smaller in size.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
the industry experiences higher shake-out, and
the active …rms have lower cost of compliance.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
3 / 24
Contribution of the paper
Explains
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
4 / 24
Contribution of the paper
Explains
the empirical regularities of industry dynamics,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
4 / 24
Contribution of the paper
Explains
the empirical regularities of industry dynamics,
the (mixed) empirical evidence on the e¤ect of environmental
regulation on shake-out.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
4 / 24
Contribution of the paper
Explains
the empirical regularities of industry dynamics,
the (mixed) empirical evidence on the e¤ect of environmental
regulation on shake-out.
In our model shake-out occurs as a part of socially e¢ cient
competitive behavior of dynamic equilibrium path of an industry. It
does not imply any anticompetitive role of environmental regulation.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
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Structure of the model
T (1 < T < ∞) period deterministic dynamic model.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
5 / 24
Structure of the model
T (1 < T < ∞) period deterministic dynamic model.
Homogenous good industry with exogenously given level of
environmental regulation (α).
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
5 / 24
Structure of the model
T (1 < T < ∞) period deterministic dynamic model.
Homogenous good industry with exogenously given level of
environmental regulation (α).
Continuum of identical price taking potential entrants, each of
measure zero.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
5 / 24
Structure of the model
T (1 < T < ∞) period deterministic dynamic model.
Homogenous good industry with exogenously given level of
environmental regulation (α).
Continuum of identical price taking potential entrants, each of
measure zero.
Free entry and exit.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
5 / 24
Structure of the model
T (1 < T < ∞) period deterministic dynamic model.
Homogenous good industry with exogenously given level of
environmental regulation (α).
Continuum of identical price taking potential entrants, each of
measure zero.
Free entry and exit.
Stationary market demand D (p ).
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
5 / 24
Production Cost
Continuously di¤erentiable production cost c (q ) where c : R+ ! R+
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
6 / 24
Production Cost
Continuously di¤erentiable production cost c (q ) where c : R+ ! R+
Upward sloping marginal cost with …xed cost
0
00
c (0) > 0, c > 0, c > 0
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
6 / 24
Production Cost
Continuously di¤erentiable production cost c (q ) where c : R+ ! R+
Upward sloping marginal cost with …xed cost
0
00
c (0) > 0, c > 0, c > 0
U-shaped average cost curve.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Investment
γ (x ): cost of investment where x
…rm.
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0 is the investment made by a
Environmental Regulation and Industry Dynamics
30th January, 2010
7 / 24
Investment
γ (x ): cost of investment where x
…rm.
0 is the investment made by a
γ : R+ ! R+ is continuously di¤erentiable, strictly increasing convex
function.
0
γ (0) = 0, γ > 0 and γ" 0.
y 2 R+ : the stock of capital of a …rm.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
7 / 24
Investment
γ (x ): cost of investment where x
…rm.
0 is the investment made by a
γ : R+ ! R+ is continuously di¤erentiable, strictly increasing convex
function.
0
γ (0) = 0, γ > 0 and γ" 0.
y 2 R+ : the stock of capital of a …rm.
If a …rm enters in period τ, then for t > τ,
yt = xτ + xτ +1 + ...... + xt ,
Aditi Sengupta (SMU)
yτ = 0.
Environmental Regulation and Industry Dynamics
30th January, 2010
7 / 24
Investment
γ (x ): cost of investment where x
…rm.
0 is the investment made by a
γ : R+ ! R+ is continuously di¤erentiable, strictly increasing convex
function.
0
γ (0) = 0, γ > 0 and γ" 0.
y 2 R+ : the stock of capital of a …rm.
If a …rm enters in period τ, then for t > τ,
yt = xτ + xτ +1 + ...... + xt ,
yτ = 0.
No externality across the …rms arising from cost reducing investment.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
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Environmental Regulation
α 2 R+ : the exogenous level of regulation imposed on the industry in
order to control the pollution generated by these …rms.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Environmental Regulation
α 2 R+ : the exogenous level of regulation imposed on the industry in
order to control the pollution generated by these …rms.
It is assumed to be constant over a dynamic path of an industry.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
8 / 24
Environmental Regulation
α 2 R+ : the exogenous level of regulation imposed on the industry in
order to control the pollution generated by these …rms.
It is assumed to be constant over a dynamic path of an industry.
α = 0 implies no regulation.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
8 / 24
Environmental Regulation
α 2 R+ : the exogenous level of regulation imposed on the industry in
order to control the pollution generated by these …rms.
It is assumed to be constant over a dynamic path of an industry.
α = 0 implies no regulation.
α can take di¤erent forms of pollution control measures.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
8 / 24
Cost of Compliance
Cost of compliance with the exogenous regulation (α)
φ (q, y , α)
3 ! R is continuously di¤erentiable in all the arguments.
where φ : R+
+
Assumptions:
φ(q, y , 0) = 0 and φ(0, y , α) = 0
φq > 0, φy
0
γ (0) <
δφy (q, 0, α) 8q > 0, α > 0 where δ 2 (0, 1)
φqq > 0, φqy
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0 and φα > 0.
0, φqα > 0, φyy > 0 and φy α
Environmental Regulation and Industry Dynamics
0.
30th January, 2010
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Maximization problem
Given α and p = (p1 , ....pT ) , a typical …rm i maximizes discounted sum of
pro…t
τ (i )
∑
δt
τ (i )
[pt qt (i )
c (qt (i ))
φ (qt (i ) , yt (i ) , α)
γ (xt (i ))]
t = τ (i )
with respect to the period of entry τ (i ), period of exit τ (i ) ,output qt (i ) ,
and investment xt (i ).
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
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De…nition of Industry Equilibrium
Given the exogenous level of regulation α > 0, an industry equilibrium
consists of period of entry, period of exit, output and investment pro…le of
…rms and price vector p such that
market clears in every period,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
11 / 24
De…nition of Industry Equilibrium
Given the exogenous level of regulation α > 0, an industry equilibrium
consists of period of entry, period of exit, output and investment pro…le of
…rms and price vector p such that
market clears in every period,
the output-investment for each active …rm maximizes its net
discounted sum of pro…ts over its lifetime,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
11 / 24
De…nition of Industry Equilibrium
Given the exogenous level of regulation α > 0, an industry equilibrium
consists of period of entry, period of exit, output and investment pro…le of
…rms and price vector p such that
market clears in every period,
the output-investment for each active …rm maximizes its net
discounted sum of pro…ts over its lifetime,
irrespective of the period of entry and exit, all that enter the industry
earn exactly zero net intertemporal pro…t over their lifetime in the
industry,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
11 / 24
De…nition of Industry Equilibrium
Given the exogenous level of regulation α > 0, an industry equilibrium
consists of period of entry, period of exit, output and investment pro…le of
…rms and price vector p such that
market clears in every period,
the output-investment for each active …rm maximizes its net
discounted sum of pro…ts over its lifetime,
irrespective of the period of entry and exit, all that enter the industry
earn exactly zero net intertemporal pro…t over their lifetime in the
industry,
no …rm can make strictly positive intertemporal pro…t irrespective of
its period of entry
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
11 / 24
De…nition of Industry Equilibrium
Given the exogenous level of regulation α > 0, an industry equilibrium
consists of period of entry, period of exit, output and investment pro…le of
…rms and price vector p such that
market clears in every period,
the output-investment for each active …rm maximizes its net
discounted sum of pro…ts over its lifetime,
irrespective of the period of entry and exit, all that enter the industry
earn exactly zero net intertemporal pro…t over their lifetime in the
industry,
no …rm can make strictly positive intertemporal pro…t irrespective of
its period of entry
There exists an industry equilibrium, and it is (restricted) socially
optimal (maximizes discounted sum of consumer and producer surplus
in the industry over time).
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
11 / 24
Main Results
Characteristics of dynamic equilibrium path
For a given level of regulation (α), on any industry equilibrium path
prices are non-increasing over time,
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Main Results
Characteristics of dynamic equilibrium path
For a given level of regulation (α), on any industry equilibrium path
prices are non-increasing over time,
no entry occurs after the initial period,
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
12 / 24
Main Results
Characteristics of dynamic equilibrium path
For a given level of regulation (α), on any industry equilibrium path
prices are non-increasing over time,
no entry occurs after the initial period,
some …rms exit before others (shake-out), and
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
12 / 24
Main Results
Characteristics of dynamic equilibrium path
For a given level of regulation (α), on any industry equilibrium path
prices are non-increasing over time,
no entry occurs after the initial period,
some …rms exit before others (shake-out), and
…rms that exit earlier have lower accumulated investment, higher
compliance cost, and smaller in size.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
12 / 24
Why does shake-out of …rms occur on the industry
equilibrium path?
Social planner’s perspective
Introduction of regulation=) steep marginal cost curve =) large number
of …rms to # the total cost of the industry.
Strictly positive investment =) ‡atter e¤ective marginal cost over
time.=) # number of …rms in the industry.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Numerical example 1
Three period model
D (p ) = 100
p, c (q ) = 10 + e q , γ(x ) = 0.5x 2
φ (q, y , α) = α.e (q, y ) = αe q
λy
δ = 0.5 is the discount factor
λ 0 is the e¢ ciency of accumulated capital in compliance cost
reduction.
α = 0.03 is the exogenous unit pollution tax rate.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Example 1: results
t
1
2
3
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Table 1: Dynamic equilibrium
D (p )
nt nt
pt
D (pt ) nt = qt t
nt 1
8.7637
8.7569
8.7432
91.2362
91.2430
91.2567
42.6125
42.5474
42.5366
Environmental Regulation and Industry Dynamics
1
0.0015
0.0002
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Example 1: results
Table 2: Firm that exits at the end of period 2
t
qt
xt
πt
1 2.1410 0.1141
0.0065
2 2.1434
0
0.0130
Table 3: Firm that exits at the end of period 3
t
qt
xt
πt
1 2.1410 0.1588
0.0126
2 2.1445 0.0990
0.0180
3 2.1454
0
0.0142
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Comparative dynamics
Example 2
D (p ) = p
1.5
,
c (q ) = 1 + q 2 ,
γ(x ) = 0.5x 2
φ (q, y , α) = αe (q, y ), e (q, y ) = q 1.5 (1
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Environmental Regulation and Industry Dynamics
y )5
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Results
Example 2
Table 4
t
α
q
x1
p
D (p )
1
2
1
2
1
2
1
2
0.03
0.03
0.05
0.05
0.07
0.07
0.10
0.10
0.9925
0.9961
0.9876
0.9958
0.9828
0.9962
0.9827
0.9827
0.0585
0
0.0865
0
0.1094
0
0.1358
0
2.0299
2.0256
2.0498
2.0392
2.0696
2.0519
2.0588
2.0588
0.3457
0.3468
0.3407
0.3433
0.3358
0.3404
0.3313
0.3313
Aditi Sengupta (SMU)
n=
D (p )
q
0.3483
0.3481
0.3449
0.3448
0.3417
0.3416
0.3371
0.3371
Environmental Regulation and Industry Dynamics
nt nt
nt 1
1
0.0004
0.0005
0.0001
0
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Main Results
Comparative dynamics
Consider two period model.
Additional assumption: for any given level of regulation, on industry
equilibrium path some …rms exit after period 1.
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Comparative dynamics
Su¢ cient conditions under which on the equilibrium path with more
stringent regulation active …rms invest more i.e., have lower cost of
compliance.
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Comparative dynamics
Su¢ cient conditions under which on the equilibrium path with more
stringent regulation active …rms invest more i.e., have lower cost of
compliance.
Why would a …rm not invest more on the higher regulation path?
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
20 / 24
Comparative dynamics
Su¢ cient conditions under which on the equilibrium path with more
stringent regulation active …rms invest more i.e., have lower cost of
compliance.
Why would a …rm not invest more on the higher regulation path?
With high regulation the compliance cost is high, and thus …rms want
to invest more to reduce that cost.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
20 / 24
Comparative dynamics
Su¢ cient conditions under which on the equilibrium path with more
stringent regulation active …rms invest more i.e., have lower cost of
compliance.
Why would a …rm not invest more on the higher regulation path?
With high regulation the compliance cost is high, and thus …rms want
to invest more to reduce that cost.
But there is a disincentive e¤ect: If regulation is quite high then the
return from investment may not be that pro…table.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
20 / 24
Comparative dynamics
Su¢ cient conditions under which on the equilibrium path with more
stringent regulation active …rms invest more i.e., have lower cost of
compliance.
Why would a …rm not invest more on the higher regulation path?
With high regulation the compliance cost is high, and thus …rms want
to invest more to reduce that cost.
But there is a disincentive e¤ect: If regulation is quite high then the
return from investment may not be that pro…table.
Two extreme cases: Prohibitive regulation (regulation too high) and
No regulation =) zero investment.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Comparative dynamics
Su¢ cient conditions under which the industry experiences higher
shake-out.
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Environmental Regulation and Industry Dynamics
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Comparative dynamics
Su¢ cient conditions under which the industry experiences higher
shake-out.
Conditions under which on a dynamic path with higher regulation the
number of …rms is higher in period 1 and lower in period 2.
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Number of firms = Total industry output (Q) /
minimum efficient scale (q)
price
Marginal cost under
stringent regulation
Average cost under
stringent regulation
Average cost under
weak regulation
Price under
stringent
regulation
Marginal cost under
weak regulation
Demand curve
Price under weak
regulation
Q1/q1 > Q2/q2
q, Q
q1
q2
Q1
Q2
Higher number of firms in period 1 under stringent regulation
Comparative dynamics
Higher number of …rms in period 1
The price in period 1 is exactly equal to minimum average cost of a
new entrant.
Each …rm produces at its minimum e¢ cient scale earning exactly zero
current pro…t (gross of investment).
Therefore, the number of …rms in period 1 is higher on the more
stringent regulation path i¤ the minimum e¢ cient scale is more
sensitive to regulation than the total industry demand (possible when
the demand curve is su¢ ciently inelastic).
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Comparative dynamics
Three e¤ects of higher regulation on the number of …rms
E¤ect 1: (Given investment) higher level of regulation =) " cost
of the industry =) " the equilibrium price and # total industry
output sold =) # the number of …rms in period 2. (Direct e¤ect)
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30th January, 2010
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Comparative dynamics
Three e¤ects of higher regulation on the number of …rms
E¤ect 1: (Given investment) higher level of regulation =) " cost
of the industry =) " the equilibrium price and # total industry
output sold =) # the number of …rms in period 2. (Direct e¤ect)
E¤ect 2: (Given investment) higher level of regulation =) " the
average cost and the e¤ective marginal cost =) alter the optimal
scale =) a¤ect the number of …rms depending on the direction and
extent of changes in optimal scale. (Direct e¤ect)
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Comparative dynamics
Three e¤ects of higher regulation on the number of …rms
E¤ect 1: (Given investment) higher level of regulation =) " cost
of the industry =) " the equilibrium price and # total industry
output sold =) # the number of …rms in period 2. (Direct e¤ect)
E¤ect 2: (Given investment) higher level of regulation =) " the
average cost and the e¤ective marginal cost =) alter the optimal
scale =) a¤ect the number of …rms depending on the direction and
extent of changes in optimal scale. (Direct e¤ect)
E¤ect 3: " in regulation may " investment =) " in the optimal
scale =) # the number of …rms. (Indirect e¤ect)
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Environmental Regulation and Industry Dynamics
30th January, 2010
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Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24
Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
The e¤ect of the increasing stringency of environmental regulation on
industry dynamics i.e., size distribution, investment behavior,
heterogeneity and shake-out of …rms.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24
Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
The e¤ect of the increasing stringency of environmental regulation on
industry dynamics i.e., size distribution, investment behavior,
heterogeneity and shake-out of …rms.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
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Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24
Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
The e¤ect of the increasing stringency of environmental regulation on
industry dynamics i.e., size distribution, investment behavior,
heterogeneity and shake-out of …rms.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
the industry experiences higher shake-out (; anti-competitive role)
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24
Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
The e¤ect of the increasing stringency of environmental regulation on
industry dynamics i.e., size distribution, investment behavior,
heterogeneity and shake-out of …rms.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
the industry experiences higher shake-out (; anti-competitive role)
the active …rms invest more to reduce future stream of compliance cost.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24
Conclusion
Establishes a relation between environmental regulation and industry
dynamics via investment in compliance technology.
The e¤ect of the increasing stringency of environmental regulation on
industry dynamics i.e., size distribution, investment behavior,
heterogeneity and shake-out of …rms.
Finds su¢ cient conditions under which on the equilibrium path with
more stringent regulation:
the industry experiences higher shake-out (; anti-competitive role)
the active …rms invest more to reduce future stream of compliance cost.
Explains the empirical regularities of industry dynamics. and the
(mixed) empirical evidence on the e¤ect of environmental regulation
on shake-out.
Aditi Sengupta (SMU)
Environmental Regulation and Industry Dynamics
30th January, 2010
24 / 24