Computational experiments concerning the effects of pollution abatement capital investment on U.S. manufacturing productivity

As part of a variety of assumptions made by researchers investigating the impact of environmental regulation on economic performance, investment in abatement capital is normally assumed to be non-productive. Other researchers have argued that strict environmental regulation may actually improve productivity through capital investment. This dissertation addresses the apparent contradiction within the literature by redefining pollution abatement capital as either non-productive or with productive benefits (quasi-productive). The implications of this assumption are tested by developing a theoretical model of a profit maximizing firm's dynamic capital investment decisions given choice between both types of abatement capital. The model assumes that firms can only utilize quasi-productive abatement capital with a one period lag. By employing computational techniques which depend upon empirically estimated and computationally calibrated parameters, the following hypotheses are tested. First, I test the hypothesis that firms which adopt quasi-productive abatement capital experience greater levels of output than do firms which meet regulation with non-productive abatement capital. The second hypothesis is that varying levels of regulatory control will affect the choice of optimal capital investment paths. Finally, I test if there is an effect which arises from the announcement of impending regulation prior to its implementation. The results show that the impact of quasi-productive abatement capital is to increase output. Further, the results show the effect on output varies greatly with variations in alternative policy variables. Finally, there does not appear to be any impact from an announcement of regulation prior to its implementation. Given the ongoing debate within the economic as well as political community, research in this area has both important and immediate policy implications.