Institutions, firms and environment in a framework of innovation

Abstract

The aim of the paper is the analysis of innovation and institution as the key elements for reaching a higher social welfare and environmental quality. To determine a social optimum or a Pareto improvement, we consider the interaction between institution and firm in the short and in the medium/long run. Using a static comparative analysis, the interaction of these two agents, institution and market, is examined. Within the market an entrant and an incumbent firm are present, where the entrant firm represents the firm who radically innovates. Even if in the short run results show that the market alone is able to realize a Pareto improvement, however, whenever institution intervenes through an innovation adoption, both in short and in medium/long run a preferable solution with a better performance is reached. Our main results highlight that the strategic role of an innovating institution in each case considered consists in innovating towards green technology and in creating a competitive, attractive and environmentally sustainable milieu. From this point of view, technology innovation plays a central role in an economic and territorial development, orienting and optimizing the relationship between environmental quality and firm performance.