Pollution Abatement Investment When Firms Lobby Against Environmental Regulation
AbstractIn this paper, we study a firm’s optimal lobby behavior and its effect on investment in pollution abatement capital. We develop a dynamic framework where a representative firm can invest in both abatement and lobby capital in response to a possible future increase in pollution tax. We show that when the firm lobbies against the scale of the tax increase at a predetermined date, it should act like an occasional lobbyer by investing a lump-sum (optimal) amount in the lobby capital only at that date. But, to delay the new tax, it should act like a habitual lobbyer by investing continuously and at increasing rates over an optimal time period. We show that lobby expenditure crowds out investment in abatement capital and that this effect is stronger the more efficient is the lobbying activity. Further, we show that while uncertainty about the magnitude of the tax reduces the firm’s incentive to lobby, uncertainty about the timing of the new tax increases it.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.82.
Date of creation: Sep 2003
Date of revision:
Pollution Abatement; Environmental Regulation;
Find related papers by JEL classification:
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-MIC-2004-09-12 (Microeconomics)
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