Competing recombinant technologies for environmental innovation: extending Arthur’s model of lock-in

This article presents a model of sequential decisions about investments in environmentally
dirty and clean technologies, which extends the path-dependence framework of
Arthur (1989). This allows us to evaluate if and how an economy locked into a dirty
technology can be unlocked and move towards the clean technology. The main extension
involves the inclusion of the effect of recombinant innovation of the two technologies.
A mechanism of endogenous competition is described involving a positive externality
of increasing returns to investment which are counterbalanced by recombinant innovation.
We determine conditions under which lock-in can be avoided or escaped. A second
extension is "symmetry breaking" of the system due to the introduction of an environmental
policy that charges a price for polluting. A final extension adds a cost of
environmental policy in the form of lower returns on investment implemented through
a growth-depressing factor. We compare cumulative pollution under different scenarios,
so that we can evaluate the combination of environmental regulation and recombinant
innovation.