Environmental policy, licensing strategy, and social welfare

Abstract

This paper sets up a three-stage game (technology licensing, emission tax, and output) in which one foreign firm owns both process technology and environmental technology. We compare three types of licensing strategies, process technology, environmental technology, and package licensing, showing that the licensor’s preference on licensing strategy depends on the level of marginal environmental damage. Specifically, if the environmental damage caused by the production of the home firm is large, the package licensing deal is preferred by the foreign firm; otherwise process licensing is preferred. It is also found that the social welfare may be lower after licensing.