The B.E. Journal of Economic Analysis & Policy

Published by De Gruyter

Volume 3 Issue 2 - “The Pollution Haven Hypothesis” edited by Don Fullerton

December 2004

Issue of The B.E. Journal of Economic Analysis & Policy

Contents
Journal Overview

Advances Article

Contributions Article

December 31, 2003

Pollution Havens and the Regulation of Multinationals with Asymmetric Information

Xiaodong Wu

Abstract

This paper develops a common agency model to analyze the strategic interaction between governments in regulating polluting multinationals. We show that when a firm has private information about its production technology relating output to pollution that is difficult to monitor, the information rent extraction behavior of non-cooperative governments will work against the "pollution haven" hypothesis in a Nash equilibrium with or without pooling. The "pollution haven" result is more likely to be reversed in a separating equilibrium than in a pooling equilibrium as a firm's output is further away from the most efficient outcome. This result provides an explanation for why many empirical studies do not support the "pollution haven" hypothesis even after controlling for private non-environmental cost differentials.

December 31, 2003

Does Trade Promote Environmental Coordination?: Pollution in International Rivers

Hilary Sigman

Abstract

This paper examines whether trade relationships facilitate resolution of international environmental spillovers. Trade might promote cooperation by providing opportunities for implicit side payments, allowing linkage between environmental and trade concessions, providing direct leverage over other countries' production, or instilling a perception of shared goals. Using data from the UN's Global Environmental Monitoring System (GEMS) on water quality in international rivers, the paper examines the influence of bilateral trade on pollution in rivers that cross international borders. It reports evidence of lower water pollution in rivers shared between countries with more extensive trade. Improved coordination from expanded trade may thus represent a benefit to weigh against the environmental costs of the pollution havens effect.

December 31, 2003

Environmental Policy, Population Dynamics and Agglomeration

Chris Elbers, Cees Withagen

Abstract

We present and discuss a simple model of international trade in agricultural and manufactured commodities. Production of the latter takes places under monopolistic competition, and causes pollution. We incorporate mobility of skilled labor, the input in the manufacturing sector. One of the main findings is that pollution and environmental policy tend to countervail clustering that would occur in their absence.

December 31, 2003

Cross-Country Policy Harmonization with Rent-Seeking

Patrik T Hultberg, Edward B Barbier

Abstract

In a reciprocal market model with imperfectly competitive firms, domestic policies will differ across countries that are economically and politically diverse. We explore the implications of this standard result with regard to harmonization of environmental policies between corrupt and non-corrupt countries. Imposing a more stringent policy on a non-corrupt government will be welfare reducing to the receiving country, but may be welfare enhancing for the imposing country. However, where environmental standards are under the control of a corrupt government, it is possible that harmonization is welfare enhancing to both countries.

December 31, 2003

Environmental Regulation and International Trade: Empirical Results for Germany, the Netherlands and the US, 1977-1992

Abay Mulatu, Raymond J.G.M. Florax, Cees Withagen

Abstract

We empirically investigate the responsiveness of international trade to the stringency of environmental regulation. Stringent environmental regulation may impair the export competitiveness of dirty domestic industries, and as a result, pollution havens emerge in countries where environmental regulation is relatively less stringent. We examine the impact of pollution abatement and control costs on net exports in order to grasp this phenomenon. Theoretically, our analysis is related to a general equilibrium model of trade and pollution nesting the pollution haven motive for trade with the factor endowment motive. We analyze data on two-digit ISIC manufacturing industries during the period 19771992 in Germany, the Netherlands and the US, and show that trade patterns in dirty commodities are jointly determined by relative factor endowments and environmental stringency differentials.

December 31, 2003

Pollution Abatement Expenditure by U.S. Manufacturing Plants: Do Community Characteristics Matter?

Randy A Becker

Abstract

This paper examines whether community characteristics impact the air pollution abatement (APA) activity at nearby manufacturing plants, using establishment-level data from the U.S. Census Bureaus Pollution Abatement Costs and Expenditures (PACE) survey. Controlling for facility characteristics and various forms of formal environmental regulation, certain community characteristics are found to have additional effects on local APA expenditures. In particular, for the most pollution-intensive industries, larger per capita income is found to increase plant-level APA activity, as is a higher degree of homeownership, a greater concentration of Democratic voters, and being located in a metropolitan area. Meanwhile, a greater presence of manufacturing employees is found to decrease APA expenditures, suggesting a constituency that is more resistant to additional regulation. If local populations can indeed affect pollution abatement activity, they can impact the spatial distribution of pollution, thereby creating pollution haven effects.

December 31, 2003

Environmental Regulation as Export Promotion: Product Standards for Dirty Intermediate Goods

Carol McAusland

Abstract

We employ a stylized model of trade in dirty intermediate goods to examine the impacts of product standards on trade volumes and pollution levels. Our focus is on the case with economies of scale in intermediate good production. In this setting, changes in one country's demand for dirty inputs can feed back to affect the quality of intermediate goods offered for sale in international markets. We provide conditions under which tightening product standards in one country can raise both the profits of and exports from that country's final good producers. Greening product standards can have perverse environmental impacts: tightening rules governing emissions arising from the use of dirty inputs may raise rather than reduce local pollution.

December 31, 2003

Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?

Beata Smarzynska Javorcik, Shang-Jin Wei

Abstract

The pollution haven hypothesis refers to the possibility that multinational firms, particularly those engaged in highly polluting activities, relocate to countries with weaker environmental standards. Despite the plausibility and popularity of this hypothesis, the existing literature has found only limited evidence to support it. To enhance our ability to detect the possible dirty secret, this study makes improvements in four areas. First, we focus on investment flows from multiple countries to 25 economies in Eastern Europe and the former Soviet Union. Transition countries are a suitable region for studying this question, as they offer a large variation in terms of environmental standards. Second, we take into explicit account the effect of host country corruption. Third, we include information on both the polluting-intensity of the potential investor and the environmental stringency in the potential host country, which allows us to test whether dirty industries are relatively more attracted to locations with weak standards. And fourth, we rely on firm-level rather than industry-level data. Despite these improvements, we find no support for the pollution haven hypothesis. If anything, firms in less polluting industries are more likely to invest in the region. We find no systematic evidence that FDI from dirtier industries is more likely to go to countries with weak environmental regulations.

About this journal

Objective
The B.E. Journal of Economic Analysis & Policy (BEJEAP) welcomes submissions that employ microeconomics to analyze issues in organizational economics, consumer behavior, and public policy. Articles submitted to BEJEAP can come in two formats: research papers and letters. Authors should bring to their analysis whatever microeconomic theoretical, experimental or econometric tools are helpful. We publish both empirical work and applied theory (though not more abstract forms of applied theory), and our aim is to disseminate papers that have practical implications for public policy, organizational or individual decision making.

Topics

Design of organizations and institutions
Industrial organization
Health economics
Public finance
Labour Economics
Economics of education, family, development, law, or the environment
Effects of domestic and international policy

Article formats
Research Papers, Letters

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