Incentives for Firms to Share Abatement Technology under a Proportional Liability Rule

We analyze in this paper the technology diffusion decisions of two polluting firms. Firm 1, armed with superior pollution abatement technology, must decide on how much technology to share with firm 2. Meanwhile, firm 2 must determine how much of the available technology to adopt. Though inspired by \citet{Le42:6}, which investigates a related issue under environmental laws of strict liability and negligence rules, this paper differs crucially in two fundamental aspects: we consider a proportional liability rule and costly technology diffusion. We find that the decision to release or adopt more advanced technology hinges on the form of external damage as well as the existence of diffusion costs. Only when external damage is linear and technology diffusion is free will the market equilibrium be efficient.