Does Trade Liberalization Make the Porter Hypothesis Less Relevant?

Abstract

The Porter Hypothesis refers to the idea that environmental regulations push firms into_x000D_ developing and adopting new technologies. Controversially, it asserts that the investments in new technology that the firms are pushed into making would be profitable irrespective of_x000D_ whether the regulations had have been put in place. In this paper a simple model is used to_x000D_ illustrate a Porter Hypothesis situation. This framework allows us to establish what conditions_x000D_ are required for a tariff reduction to be an alternative to environmental regulations. That is, we look at a case where, under tariff protection, the firm will only invest in new technology when the environmental regulation is put in place, but in the absence of tariffs, the firm will invest in new technology irrespective of whether the environmental regulation is in place.