Productivity and environmental regulation: an analysis of the Porter hypothesis.

Summary According to Porter's hypothesis, strict environmental regulations should have a positive impact on the productivity of affected firms. The authors review the theoretical and empirical arguments surrounding this hypothesis. They show that there is little strong theoretical support for this hypothesis but that recent theoretical developments (such as the theory of the firm) offer interesting insights. Empirically, most of the evidence suggests that, overall, environmental regulations have a rather negative impact on the firms subject to them. However, this research has many limitations, including a lack of a theoretical framework. In addition, the productivity measures used are generally inadequate since they do not explicitly account for the existence of undesirable outputs. The authors review recent work on green productivity measures. From this review of the literature, the authors conclude that while one should remain skeptical of this hypothesis, it is still premature to reject it completely.