DP14581 Environmental Preferences and Technological Choices : Is Market Competition Clean or Dirty?

Author(s): Philippe Aghion, Roland Bénabou, Ralf Martin, Alexandra Roulet
Publication Date: April 2020
Date Revised: April 2020
Keyword(s): climate change, Competition, Environment, Innovation, patents, Social Responsibility
JEL(s): D21, D22, D62, D64, H23, O3, O31
Programme Areas: Public Economics, Industrial Organization, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14581

This paper investigates the joint effect of consumers' environmental concerns and product-market competition on firms' decisions whether to innovate "clean" or "dirty". We first develop a step-by-step innovation model to capture the basic intuition that socially responsible consumers induce firms to escape competition by pursuing greener innovations. To test and quantify the theory, we bring together patent data, survey data on environmental values, and competition measures. Using a panel of 8,562 firms from the automobile sector that patented in 42 countries between 1998 and 2012, we indeed find that greater exposure to environmental attitudes has a significant positive effect on the probability for a firm to innovate in the clean direction, and all the more so the higher the degree of product market competition. Results suggest that the combination of historically realistic increases in prosocial attitudes and product market competition can have the same effect on green innovation as major increase in fuel prices.