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Location choice under trade and environmental policies

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  • Celik, Sule
  • Orbay, Benan Zeki

Abstract

In this paper, we use a game theoretic model to analyze the trade-off between the attractiveness of FDI and the environmental damage caused by production under asymmetric information. In the first stage, the domestic developing country reveals the level of import tariff and pollution tax under information uncertainty about the environmental damage that the foreign firm can cause. The foreign firm from a developed country decides where to locate afterwards with complete information about its own damage. Results show that the developing country can be better off encouraging FDI if and only if the marginal damage of pollution is sufficiently low. The optimal level of pollution taxes attracting FDI is higher than the marginal damage of pollution. However, the optimal pollution tax without FDI can be lower than the marginal damage of pollution with sufficiently high demand in the developing country.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 4 (July)
Pages: 1710-1715

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1710-1715

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Environmental policies Trade policies Foreign direct investment;

References

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  1. Abe, Kenzo & Zhao, Laixun, 2005. "Endogenous international joint ventures and the environment," Journal of International Economics, Elsevier, vol. 67(1), pages 221-240, September.
  2. Yuquing Xing & Charles Kolstad, 2002. "Do Lax Environmental Regulations Attract Foreign Investment?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 1-22, January.
  3. List, John A. & Co, Catherine Y., 2000. "The Effects of Environmental Regulations on Foreign Direct Investment," Journal of Environmental Economics and Management, Elsevier, vol. 40(1), pages 1-20, July.
  4. Markusen, James R., 1997. "Costly pollution abatement, competitiveness and plant location decisions," Resource and Energy Economics, Elsevier, vol. 19(4), pages 299-320, November.
  5. Markusen James R. & Morey Edward R. & Olewiler Nancy D., 1993. "Environmental Policy when Market Structure and Plant Locations Are Endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 69-86, January.
  6. Taiji Furusawa & Keisaku Higashida & Jota Ishikawa, 2004. "Tariffs versus quotas in the presence of imperfect competition and cross-border externalities," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 445-458, May.
  7. Dean, Judith M. & Lovely, Mary E. & Wang, Hua, 2005. "Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China," Policy Research Working Paper Series 3505, The World Bank.
  8. Neary, J Peter, 1991. "Cost Asymmetries in International Subsidy Games: Should Governments Help Winners or Losers?," CEPR Discussion Papers 560, C.E.P.R. Discussion Papers.
  9. M. Kayalica & Sajal Lahiri, 2005. "Strategic Environmental Policies in the Presence of Foreign Direct Investment," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(1), pages 1-21, January.
  10. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
  11. Ulph, A. & Valentini, L., 1997. "Plant location and strategic environmental policy with inter-sectoral linkages," Resource and Energy Economics, Elsevier, vol. 19(4), pages 363-383, November.
  12. Georges Tanguay, 2001. "Strategic Environmental Policies under International Duopolistic Competition," International Tax and Public Finance, Springer, vol. 8(5), pages 793-811, November.
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Cited by:
  1. Ouchida, Yasunori & Goto, Daisaku, 2014. "Do emission subsidies reduce emission? In the context of environmental R&D organization," Economic Modelling, Elsevier, vol. 36(C), pages 511-516.

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