The Porter Hypothesis postulates that the costs of compliance with environmental standards may be offset by adoption of innovations they trigger. We model this hypothesis using a game of timing of technology adoption. We show that times of adoption are earlier the higher the non-adoption tax. The environmental tax turns the preemption game with low profits into a game with credible precommitment yielding high profits (pro-Porter). If there is a precommitment game without environmental taxes, the introduction of a tax leads to lower profits (anti-Porter). An evaluation of the empirical literature indicates that the Porter hypothesis holds even for profit-maximizing firms under multiple market imperfections such as imperfect competititon, X-inefficiency, and agency costs. These are more likely to be present in sectors with large firms. In many case studies that we evaluate, though, we detect an element of explicit or implicit subsidies for environmentally friendly behaviour, which is in line with Pigovian policies.
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Paper provided by United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology in its series UNU-MERIT Working Paper Series with number
024.
Find related papers by JEL classification: Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation F1 - International Economics - - Trade H7 - Public Economics - - State and Local Government; Intergovernmental Relations O3 - Economic Development, Technological Change, and Growth - - Technological Change
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