In this paper, the reaction of firms to the introduction of environmental charges in a given industry is analysed. Firms may decide either to relocate their plants abroad or to adopt a new environmental-friendly technology. The latter can be either developed by investing in R&D or obtained by buying a licence. We show that, even if domestic firms share the same initial technology, at the equilibrium they make different choices in response to the same environmental policy. Some firms decide to co-operate in carrying out environmental R&D, other firms re-locate their plants abroad, and a third group decides to innovate through imitation. The size of the three groups can be affected by the government's industrial, trade and environmental policies.
Endogenous coalition formation Environmental tax R&D co-operation Non co-operative game theory