The Strong Porter Hypothesis in an Endogenous Growth Model with Satisficing Managers

Few endogenous growth models have focused attention on the strong Porter hypothesis, that stricter environmental policies induce innovations, the benefits of which exceed the costs. A key assumption in this hypothesis is that policy strictness pushes firms to overcome some obstacles to profit maximization. We model this hypothesis by incorporating pollution and taxation in the Aghion and Griffith (2005) analysis of growth with satisficing managers. Our theoretical results predict the strong Porter hypothesis. Moreover, they suggest that the stringency of environmental policy should adjust to changes in the level of potential competition in the intermediate inputs sector.