Institutions and Innovation as Driving Forces Towards a Smart City and Sustainable Territorial Development

The aim of the chapter is the analysis of innovation and institution as key-elements for reaching a higher social welfare and for improving environmental quality. To determine a social optimum or a Pareto improvement, we consider the interaction between institution and firm in the short and in the medium/long run. Using a static comparative analysis, the interaction of these two agents, institution and market, is examined. Within the market an entrant and an incumbent firm are present, and the entrant firm radically innovates. Even if in the short run results show that the market alone is able to realize a Pareto improvement, an institution action through an innovation adoption is a preferable solution for gaining a higher social welfare equilibrium, both in the short and/or in the medium/long run. Our main results highlight that the strategic role of an innovating institution in each case considered consists in innovating towards green technology and in creating a competitive, attractive and environmentally sustainable milieu. From this point of view, technology innovation plays a central role in an economic and territorial development, orienting and optimizing the relationship between environmental and firm quality.