Optimal Acquisition of Pollution Control Equipment Under Uncertainty

This paper considers a firm, which has to acquire a certain amount of pollution control equipment in order to comply with government pollution standards. Due to political battles and lobbying efforts, the compliance date and the date when it is announced are not known in advance. Furthermore, the target stock of pollution control equipment is also unknown. This amounts to an optimal control problem, in which the terminal time and the terminal state are random variables for which certain probability distributions can be estimated. The model explicitly considers technological progress in the production of abatement equipment, which leads to decreasing installation costs over time. Furthermore it is assumed that having a high stock of abatement equipment at early stages improves the firm's public image and thus its revenue. Tax deductions and other benefits for health conscious firms are also taken into account. Using optimal control theory the optimal investment in pollution control equipment is obtained, and the sensitivity with respect to discounting, wear out, technological progress and with respect to the parameters of the probability distributions is investigated.

• 저널Management Science · 38(5) · 609–622
• 토픽Climate Change Policy and Economics · Economics and Econometrics
• DOI10.1287/mnsc.38.5.609
• 저자Richard F. Hartl