Abstract

We investigate the effects of consumers’ environmental concerns and market competition on firms’ decisions to innovate in “clean” technologies. Agents care about their consumption and environmental footprint; firms pursue greener products to soften price competition. Acting as complements, these forces determine R&D, pollution, and welfare. We test the theory using panel data on patents by 8,562 automobile-sector firms in 41 countries, environmental willingness-to pay, and competition. As predicted, exposure to prosocial attitudes fosters clean innovation, all the more so where competition is strong. Plausible increases in both together can spur it as much as a large fuel-price increase.