Growth, environment and innovation—a model with production vintages and environmentally oriented research

I develop an innovative environmental new growth model driven by researchers striving for monopoly profits. Skilled labour is allocated between production vintages and two forms of research, ordinary and environmentally oriented. The intermediate sector includes fixed costs and decreasing returns, limiting the number of vintages used. I solve for planner's, laissez-faire, and regulator's solutions, and examine welfare implications and the various distortions in the model (monopoly power, knowledge spillovers, business stealing, environmental externalities). A regulator may wish: (i) to encourage environmentally oriented research; (ii) to concentrate production labour on recent (cleaner) vintages; (iii) to switch labour from production to research. An environmental sales tax may under some circumstances achieve all three—such taxes not only give incentives to reduce pollution, but also shift profits from old vintages to new, thus raising incentives to come up with newer (cleaner) vintages. An environmental tax may even lead to an increase in the rate of production growth.