Linking innovation investment and environmental performance: an impure dynamic public good model.

This paper develops a theoretical model in order 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 are taken over time. Knowledge stock is considered as an impure public good which results in both public and private benefits. We first show that the reaction function between one representative agents' 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 public and private characteristics.