Innovation in Salmon Farming: Enhancing Profitability or Reducing Environmental Hazards?

We analyze the incentives for innovation in salmon farming. To limit environmental hazards, entry into the industry is regulated. The direction of technical change can involve innovations that either enhance profitability or reduce environmental hazards. We then pose the following research question: How should innovation policy be designed to obtain the right balance between profitability-enhancing and environmental-hazard-reducing innovation? Two key results emerge: First, adoption of the latest environmental-hazard-reducing technology should be subsidized or mandated, as the individual salmon farmer does not internalize the positive effect that such adoption has on other farms. Furthermore, regulators should also consider subsidizing environmental-hazard-reducing research and development (R&D), but not profitability-enhancing R&D. With entry regulation, innovators strategically seek to influence the regulator to issue more harvesting licenses. This increases the incentives to perform profitability-enhancing innovation, making subsidies to this kind of innovation superfluous.