Rethinking Directed Technical Change: When Substitution Leads to Regret

Earlier research using the directed technical change framework argues that with the right mix of policies, governments can steer firms' R&D efforts away from harmful technologies toward supposedly cleaner alternatives. This article puts that assumption to the test by examining the impact of the 2004 Stockholm Convention, which banned 12 highly toxic persistent organic pollutants (POPs), on the development of alternative chemical compounds. Does regulation truly drive innovation toward safer substitutes, or does it create new risks under a different guise? Our results show that rather than steering innovation towards safer alternatives, the Stockholm Convention has incentivized the development of patents containing s.c. "regrettable" chemicals -i.e. chemicals that, while not banned under the Convention, exhibit POP-like characteristics, particularly high toxicity and persistence. Our study suggests that a closer inspection of the substitute technologies is crucial to understanding the effectiveness of incentives set to replace dirty technologies with cleaner ones.