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Does increasing environmental policy stringency lead to accelerated environmental innovation? A research note

ABSTRACT This research note empirically investigates the effect of stringent environmental regulations on environmentally friendly technological innovation for 27 OECD countries from 1990 to 2015, using the two-step system-GMM estimation method for a linear dynamic panel data model. We further test the robustness of the empirical results by the method of correlated random effects for dynamic panel data estimated by Maximum Likelihood, the fixed effect with Driscoll–Kraay standard errors and the mixed-effect maximum-likelihood estimator. Overall, we find that increasing environmental policy stringency leads to accelerated environmental innovation. In addition, the non-market-based environmental policy instruments are found to stimulate more environmental innovation than market -based instruments. Thus, the instruments based on command and control policies are more effective than price mechanisms in inducing eco-innovation.