Abstract
This paper investigates the relationship between environmental regulation and innovation in a homogeneous duopoly market. Most of existing studies in this field have analyzed the effect of environmental regulation on the optimal behavior of firms when one innovation is feasible. In our model, firms have multiple types of innovation and have to choose one innovation among them. We examine the effect of environmental regulation on the choice of innovation. Our main contributions are as follows. First, we derive the conditions that environmental friendly and cost-reducing innovation is selected in Bertrand competition. Second, we show how environmental regulation affects on the choice of innovation.
