“Regulation, Innovation, and Firm Selection: The Porter Hypothesis Revisited”

Larry Qiu, The University of Hong Kong

Mohan Zhou, Central University of Finance and Economics

Xu Wei, Central University of Finance and Economics

The Porter Hypothesis (PH) posits that well-designed environmental regulations can stimulate innovation, which may lead to efficiency gains or even profit increase for the regulated firms. Extant theoretical works examining the PH neglect two important aspects in their models and analyses: firm heterogeneity and general equilibrium. In this study, we revisit the PH by incorporating these two features in our model and analysis. We show that the PH holds for high-capability firms, but not for low-capability firms. Although heterogeneous responses exist in innovation investment, the average industry productivity increases.