When a government agency considers tightening a standard on a pollutant, it often considers the proportion of firms that can meet the new standard, because a higher proportion suggests a more feasible standard.
A new study developed a model of regulation in which the probability of a stricter standard being enacted increased with the proportion of firms in an industry that could meet the standard. The study found that regulations that consider the proportion of firms that can meet the new standard can motivate the development of a new green technology more effectively than regulations that do not consider this factor.
Real-World Context for Environmental Policies
The study, by researchers at Carnegie Mellon University and The Hong Kong University of Science and Technology, appears in Management Science.
“Our analysis highlights the importance of considering the interplay of industry capability and uncertainty about a new green technology’s payoff in a firm’s decision about development,” says Alan Scheller-Wolf, Professor of Operations Management at Carnegie Mellon University’s Tepper School of Business, who coauthored the study.”