OPTIMAL INVESTMENT POLICIES FOR A POLLUTING FIRM IN AN UNCERTAIN ENVIRONMENT

In this paper a stochastic dynamic model of the firm is used as a fram ework to study the optimality of abatement investments. Production cau ses pollution as an inevitable byproduct and in this model the latter is taxed by the government. The firm can diminish these tax payments t hrough reducing its pollution output by carrying out abatement investm ents. It turns out that, provided that its liquidity position is suffi ciently strong, the firm performs a growth policy such that expected m arginal revenues of productive and abatement investments are balanced. Growth stops as soon as marginal revenue equals the shareholders' tim e preference rate. At that time dividend is paid out. We also obtain t hat the emissions tax rate must exceed a certain lowerbound when the g overnment wants emissions to decrease during the firm's growth phase.