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  Environmental Policy, R&D and the Porter Hypothesis in a Model of Stochastic Invention and Differentiated Product Competition by Domestic and Foreign Firms
Robert Innes
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We study a model of differentiated product competition by domestic and foreign firms that invest in environmental R&D in order to reduce costs of complying with government pollution standards. In this setting – and despite an absence of knowledge spillovers or other explicit sources of market failure in research – we find that optimal standards may often satisfy the “Porter Hypothesis” in two senses: (1) post-innovation (ex-post) environmental standards that maximize 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 to pollution abatement standards that exceed their ex-post optimal levels.

 

 
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2011 Dept. of Agricultural & Resource Economics, The University of Arizona
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Last updated May 30, 2006
Document located at http://ag.arizona.edu/arec/pubs/researchpapers/abstract2006-02.html