Center for Environmental Policy and Administration

Uncertain R&D and the Porter Hypothesis

Author:David Popp
Date: September 2005
Publication:Contributions to Economic Analysis & Policy, 4(1), Article 6

Ever since Michael Porter proposed that environmental regulations can improve competitiveness, much economic research has examined the potential for such outcomes. Attempts to model Porter hypothesis outcomes in a way consistent with neoclassical economics have focused on things such as strategic relationships between firms, moral hazard problems, and economies of scale. In this paper, I offer a simpler alternative. The results of any R&D project are uncertain. Calibrating a simple model of induced R&D with uncertainty so that the expected value of research is only positive with environmental policy, I find that between 8 and 24 percent of simulations result in cases where post-regulation profits are higher than pre-regulation profits. This result is consistent both with Porter finding specific cases with complete innovation offsets and with macro-level findings that environmental policy is not costless. I conclude by discussing the implication of these results for environmental policy and future research.


David Popp
Center for Environmental Policy and Administration
The Maxwell School, Syracuse University
Revised 06/14/2006 13:06:05