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 askey-elements for reaching a higher social welfare and for improving environmentalquality. To determine a social optimum or a Pareto improvement, we consider theinteraction between institution and firm in the short and in the medium/long run.Using a static comparative analysis, the interaction of these two agents, institutionand market, is examined. Within the market an entrant and an incumbent firm arepresent, and the entrant firm radically innovates. Even if in the short run results showthat the market alone is able to realize a Pareto improvement, an institution actionthrough an innovation adoption is a preferable solution for gaining a higher socialwelfare equilibrium, both in the short and/or in the medium/long run. Our mainresults highlight that the strategic role of an innovating institution in each caseconsidered consists in innovating towards green technology and in creating acompetitive, attractive and environmentally sustainable milieu. From this point ofview, technology innovation plays a central role in an economic and territorialdevelopment, orienting and optimizing the relationship between environmentaland firm quality.