The Strong Porter Hypothesis in an Endogenous Growth Model with Satisficing Managers

Few endogenous growth models have focused attention on the strong Porter hypothesis that stricter environmental policies induce innovations, the benefits of which exceed the costs. A key assumption underlying this hypothesis is that policy strictness pushes firms to overcome some obstacles to profit maximization. This paper incorporates pollution and taxation in the model of Aghion and Griffith (2005) of growth which includes satisficing managers and non-drastic innovation. Our theoretical results predict the strong Porter hypothesis. However, assuming drastic innovation in the model, we predict the weak Porter hypothesis. We also consider several extensions, such as a simultaneous competition policy or a command and control policy.