This paper considers a polluting firm, subject to environmental policy, who seeks to deter the entry of potential competitors. We investigate under which conditions firm profits are enhanced by regulation. We show that, contrary to common belief, inefficient firms may support environmental regulation when their production is especially polluting. In addition, we evaluate how this result is affected by the regulator’s prior beliefs accuracy and the environmental damage from pollution.
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We are very grateful to the editor, Michael Crew, and two anonymous referees for their valuable comments and their constructive suggestions. We would also like to thank all participants of the 13th International Industrial Organization Conference, especially to Ramya Shankar for her insightful comments and suggestions.
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