The purpose of this paper is to examine the effects of environmental regulation on green R&D, as well as to characterize the conditions under which the Porter hypothesis, both the weak as well as the strict version, may or may not hold.
The authors use a simple two‐stage model with environmental R&D and endogenously determined abatement costs to address these issues.
In a monopoly framework, the authors identify a channel arising out of the replacement effect that may increase R&D incentives following stricter regulation. It was found that the Porter hypothesis, both the weak as well as the strong version, is likely to hold if the new technology is relatively efficient in production, but not otherwise.
The paper makes a contribution towards the debate on the relationship between environmental regulation and green R&D, in particular the extremely influential Porter hypothesis.
