The Environmental Porter Hypothesis: Theory, Evidence and a Model of Timing of Adoption
Ben Kriechel & Thomas Ziesemer
#2007-024
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.
Keywords: Environmental Policy, Strategic Trade Theory, Technology
Adoption, Porter Hypothesis
JEL: Q2, F1, H7, O3
UNU-MERIT Working Papers
ISSN 1871-9872