This dissertation develops a decision-theoretic model for the adoption of environmentally-safer technology to identify determinants of adoption and establish if adoption is responsive to environmental regulation.
The optimal time of adoption is defined by equating the marginal benefit and the marginal cost of waiting to adopt later. The marginal benefit comprises expected improvements in the technology and reductions in its acquisition cost. The marginal cost depends on the cost of equipment, input costs and the strictness of environmental regulations. Stricter enforcement of environmental laws raises the costs of not adopting.
The adoption decision is examined under three settings. First, the technology is allowed to improve at an exogenously-determined rate. Everything else equal, a higher expected rate of technological improvement results in later adoption. Second, the firm has the option of upgrading the existing abatement technology. This reduces the marginal cost of not adopting. The gain from the improved abatement technology may eliminate the incentive for adoption of the new production technology. Finally, the firm is assumed to have imperfect information regarding the new technology. A growing stock of information may either encourage or discourage adoption depending on what the new information reveals about profitability.
A logit model was estimated to test for the impact of different factors, including environmental strictness and industry and firm characteristics, on the probability that adoption has taken place in any of 50 countries. The test was conducted on data for 1985 and 1992. While environmental strictness had a significant effect on adoption in 1985, this was not the case in 1992. Signature of 1987 Montreal Convention was a poorer proxy for strictness by 1992. Larger industries and those with larger average firm size were more likely to have adopted both in 1985 and 1992, suggesting that economies of scale and better information spur adoption.
A failure time analysis examined determinants of the speed of first adoption. The results revealed that environmental regulations did not have significant effects on the speed of first adoption, while industry capacity and firm size did. Environmental regulation accelerated adoption earlier, but profitability dominated in the long run.