Does adoption always follow innovation?

The extent to which innovation is good news for environment depends not only on the research and development incentives but also on adoption stimulus. We analyze firm’s choice of abatement technology in vertical chains. A downstream polluting monopoly can sign a contract with an upstream supplier of mature end-of-pipe equipment or develop an in-house clean technology. We show that contracting plays a crucial role in the efficiency of environmental regulation in spurring adoption. We find that polluter’s innovation may be undertaken only to increase bargaining power and a share of industry profits he manages to capture. Consequently, polluter’s and regulator’s interests are not always aligned. The role of regulator as a technology forcing authority is partially confirmed in regions of under-investment. However, the regulator may not be able to trigger innovation and/or adoption if clean technology increases marginal costs too much. On the other hand, regulator may become laxer and oppose innovation in case of over-investment. All these results rely upon the creation of total profits from the integrated vertical structure and the partitioning rule. • We analyze polluter’s make or buy choice for pollution control in a supply chain. • We contrast in-house clean tech innovation with buying end-of-pipe tech externally. • The polluter may strategically overinvest to boost bargaining power in negotiations. • Consequently, the regulator may adopt a lenient stance to avoid waste of resources. • In some cases, the regulator lacks tools to stop the polluter’s strategic innovation.