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Pollution Havens and the Regulation of Multinationals with Asymmetric Information

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  • Wu Xiaodong

    ()
    (University of North Carolina at Chapel Hill)

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    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.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 3 (2003)
    Issue (Month): 2 (December)
    Pages: 1-27

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    Handle: RePEc:bpj:bejeap:v:contributions.3:y:2004:i:2:n:1

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/bejeap

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    Cited by:
    1. Burnett, Johann Caro & Carrasco, Vinicius, 2011. "Coordination and the provision of incentives to a common regulated firm," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(5), pages 606-627, September.
    2. Silva, Emilson C.D. & Zhu, Xie, 2009. "Emissions trading of global and local pollutants, pollution havens and free riding," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 169-182, September.

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