games Article Green Innovation and Competition: R&D Incentives in a Circular Economy Giovanna Bimonte 1 , Maria Grazia Romano 1,2 and Maria Russolillo 1,3, *   Citation: Bimonte, G.; Romano, M.G.; Russolillo, M. Green Innovation and Competition: R&D Incentives in a Circular Economy. Games 2021, 12, 68. https://doi.org/10.3390/ g12030068 Academic Editors: Ulrich Berger and Alessandro Tavoni Received: 18 June 2021 Accepted: 8 September 2021 Published: 16 September 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1 Department of Economics and Statistics, University of Salerno, Via Giovanni Paolo II, 132, I-84084 Fisciano, Italy; gbimonte@unisa.it (G.B.); maromano@unisa.it (M.G.R.) 2 Department of Economics and Statistics and CSEF, University of Naples Federico II, Via Cintia, Monte S. Angelo, I-80126 Napoli, Italy 3 Faculty of Actuarial Science and Insurance, Bayes Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK * Correspondence: mrussolillo@unisa.it Abstract: The present paper provides theoretical insights regarding the determinants of firms’ incentives to invest in a Circular Economy. The analysis relies on a Cournot model disaggregating the disposal cost in the production function. In a non-simultaneous sequential game, two risk-neutral firms are endowed with a green innovation project that, if successful, would reduce the overall production costs and implement a Circular Economy. Firms are plagued by asymmetric information about the exact value of the other firm’s innovation. In this setting, the R&D investment in a Circular Economy, by affecting the distribution of production and disposal costs, influences the production decisions of both the innovating and the rival firms. The sign of the impact depends on the firms’ strategy in the product market. Furthermore, the analysis points out that cooperation in R&D of firms competing in the product market reinforces incentives to invest in green innovation. This suggests that governments aimed to advance a Circular Economy should encourage firms’ cooperation. Keywords: circular economy; cournot oligopoly; R&D investment spillovers; green innovation 1. Introduction In this contribution, we provide theoretical insights regarding the determinants of firms’ incentives to invest in Circular Economy. The Circular Economy (CE) is an extensive rethink of the industrial processes introducing new connections between production, consumption, and resources (Frosch and Gallopoulos [1]). Conceived during the 1970s and 1980s and promoted during the 1990s, the concept of CE is based on the transition from linear economic models based on take, make, use and waste towards circular models that minimise, recover, recycle, and reuse materials, water, and energy (Geissdoerfer et al. [2]; OECD [3]; Kirchherr et al. [4]). The transition is pursued throughout two crucial steps. One step involves the decoupling of the economic growth from the extraction and consumption of constrained natural resources, like fossil fuels or hard-to-recycle metals and minerals. The other step reshapes the life cycle of products by keeping resources in the overall productive system as long as possible, with the aim to use the essential inputs, have minimal wastes and to turn waste into wealth. Industrial ecology promotes resources minimisation, encourages the adoption of cleaner technologies, and emphasises the benefits of recycling residual waste materials, which become more than just rubbish (Jacobsen [5]; Andersen [6–8]). Schumpeter [9,10] asserts that innovation is the main force for economic development and CE represents an important means to reduce environmental impact while supporting sustainable economic growth (Millar et al. [11]). A promising line of research seeks to iden- tify the most efficient use of resources for economic sustainability and growth by companies and firms. However, only a few of theoretical and empirical studies have addressed the is- sue of incentives to invest in Research and Development for green innovation (green R&D) Games 2021, 12, 68. https://doi.org/10.3390/g12030068 https://www.mdpi.com/journal/games