Erik Hille, Patrick Möbius

• Given the still ambiguous empirical evidence, this paper analyzes the eironmental regulation-productivity nexus using an extended Neo-Schumpeterian productivity model. Thereby, the paper adds to the literature in three ways: First, shadow prices of energy along with industrial energy prices are employed as relative measures of eironmental policy stringency. To ensure the robustness of the results, the model is also estimated for five alternative regulatory measures that have been applied in prior research. Second, the study addresses the potential endogeneity of the eironmental regulation, innovation, and trade openness measures as a source of the inconclusive results. Third, as one of few analyses on the Porter Hypothesis, the paper utilizes a cross-country multi-sectoral dataset including also newly industrialized countries and former transition economies. The estimates show that the positive effects of increases in eironmental policy stringency on productivity, which are often found in the more recent studies, change to insignificant and partly negative effects once endogeneity is fully controlled for. Hence, no support for the strong Porter Hypothesis can be found. Instead, more stringent eironmental regulation fosters innovation and, therefore, has an indirect, yet not dominant, positive effect on productivity growth.