Partial compatibility in two-sided markets: Equilibrium and welfare analysis

Abstract

We study the impact of environmental regulation on the transfer of a clean technology where bureaucrats are needed for government intervention. In the absence of corruption, when environmental taxes are low, a technology transfer always takes place and it increases total outputs, but may lead to higher pollution levels. However, when corruption is possible, a firm with a dirty technology may choose to bribe a corruptible bureaucrat who will underreport the actual level of emissions, thereby hindering the transfer of clean technology. We show that a less strict anticorruption policy may lead to more bribing, but encourage technology transfers. Moreover, an environment-oriented government would set a deterrent environmental tax to reduce pollution, while an output-oriented government would set a minimum tax rate to eliminate corruption and induce technology transfers. However, a balanced government would tolerate corruption when the cost of bribing is low and the clean technology is sufficiently efficient.