This paper studies the relationship between climate policy, market power and innovation. Using data on patenting and firms' balance sheets, I document four stylized facts. Most importantly, I find that firms with a higher degree of market power are, on average, more invested in dirty technologies than their direct competitors. Motivated by the empirical evidence, I develop a model of directed technical change with strategic innovation incentives. A carbon tax affects market power within industries due to technology lock-in and firm heterogeneity. Strategic incentives lead some firms to respond to climate policy by increasing their dirty innovation investments. In the calibrated model, a carbon tax lowers aggregate markups and increases clean innovation along the green transition, highlighting the importance of firms' strategic decisions for climate policy.
Ansprechpartner: Fernando Loaiza
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