We study the firm's incentives to engage in research for pollution‐control technologies and to adopt new technologies that if discovers or that are discovered by other firms. Licensing of discoveries is assumed possible. We also study the regulator's problem in designing optimal environmental regulations that both control pollution and provide incentives for research. Technology adoption standards are part of the optimal regulation. Another finding is that making the adoption standard stricter reduces research.
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Biglaiser et al. (1994) studied this question.
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