Association for Public Policy Analysis & Management

What role do voluntary environmental policies play in determining firms’ innovation? The impact that such policies have on innovation is ambiguous because of two opposing effects: signaling and innovation. The signaling effect of a voluntary environmental policy hinders innovation because firms send signals to the government that they anticipate loose environmental policies in the future; they are thus less likely to innovate. Second, even though a voluntary environmental policy is less stringent than a mandatory environmental policy, firms may find ways to improve the energy efficiency of their products or use less energy to make those products. Depending on the relative sizes of the two effects, participating in the voluntary environmental program may or not lead to technological innovation.

The objective of this paper is to examine the impact that voluntary environmental policy has on innovation in household appliance firms. The key hypothesis is that firms participating in the ENERGY STAR program were more likely to innovate in response to the 1997 ENERGY STAR criteria update than firms that did not participate. To test this hypothesis, I collected patent data from 1985 to 2004 to analyze firms’ innovation behaviors related to the energy efficiency of refrigerators; I gathered the data from the United States Patent and Trademark Office database. Using a difference-in-differences estimation method, I found weak evidence of the impact of ENERGY STAR on participating firms’ patents. However, I found no evidence that the impact on innovation differed for foreign and domestic firms. I also found no evidence of a mandatory environmental policy on innovation, which suggests that voluntary policies may be crowding out mandatory ones.