(E3 ) Working Papers Series
E3 Working Paper WP-028 Abstract
WP-028: Robert Innes, "Environmental Policy, R&D and the Porter Hypothesis in a Model of Stochastic Invention and Differentiated Product Competition by Domestic and Foreign Firms" (November 2011) Full Paper
We study a model of differentiated product competition by domestic and foreign firms that compete for the domestic market and invest in environmental R&D in order to reduce costs of complying with goverment pollution standards. In this setting, we find that optimal standards may often satisfy the "Porter Hypothesis" in two senses: (1) environmental standards that maximize post-innovation (ex-post) domestic welfare may be tighter than their globally optimal counterparts; and (2) in order to spur domestic R&D, government regulators may optimally commit (ex-ante) to pollution abatement standards that exceed their ex-post optimal levels.