Environmental Tax Policy and R&D Innovation Networks

We examine the role of an environmental tax on R&D collaboration networks between firms in the context of developing cleaner production processes. First, we show that three types of innovation networks can emerge in equilibrium. Then, we examine the relationship between the environmental tax and the incentives for firms to add more collaborative links. We show that an increase in the environmental tax does not always incentivize firms to increase the number of R&D collaborations. Finally, we examine the optimal tax that the public authorities should set in order to maximize the social welfare. Given tractability issues, for this problem, we restrict our attention to the case of three firms. We establish that the optimal environmental tax depends on the cost of link formation. The higher the cost of link formation, the lower is the environmental tax. Similarly, we observe that the optimal environmental tax increases with the number of links that an efficient network contains.