This paper considers the incentives environmental liability creates to improve pollution abatement technology. Our model allows that technical progress may not only lower the level of abatement costs, as is commonly assumed in the literature, but also may reduce environmental harm directly. The paper thereby generalizes the approach taken by Endres et al. (2007).

We establish that this generalization has drastic repercussions on incentives under negligence liability, whereas the performance of strict liability is not compromised. Furthermore, it is shown that the specifics of the impact of R&D on abatement costs and environmental harm decisively determine how ex-ante and expost regulation fare with respect to welfare maximization in the case of negligence liability.