Porter's hypothesis on environmental policy in an oligopoly model with cost asymmetry caused by innovation

Porter's hypothesis that a national leadership in environmental policy can increase the international competitiveness of domestic industries is analyzed in a two-period model with Cournot competition. It is assumed that: an environmentally friendly technology leads to a decrease of unit costs in the second period. We demonstrate that a leadership can trigger the adoption of a green technology that increases the domestic firm's profits even it:aggregated unit: costs are higher; and if the firm does not innovate voluntarily The optimal domestic policy, the timing of the foreign firm's innovation, and the effect: of environmental policy on the firms' profits all depend on three factors: the probability that the policy is imitated, the difference in unit costs caused by the different technologies, and the significance of different unit costs depending on the inverse demand function.