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Role of labor intensity interaction in the relation between abatement expenditure and production

Author

Listed:
  • Bidisha Lahiri

    () (Oklahoma State University)

Abstract

Polluting industries are characterized by different levels of abatement expenditure. In countries such as the US with relatively strict environmental standards, theoretical models and intuition predict that industries that are forced to undertake greater abatement expenditure would have lower production. However this negative relation between abatement expenditure and production has been elusive in existing empirical research. The current paper starts from a standard theoretical model of production in the short run and incorporates abatement expenditure into it. This leads to an interaction term, that has been absent in existing empirical literature, which reflects that the effect of increased abatement expenditure increases the shadow price of the inputs that are immobile across industries. For the same abatement expenditure, industries more intensive in mobile labor can absorb the abatement expenditure more easily resulting in a smaller reduction in production. The empirical analysis based on the specification stemming from the theoretical model finds the coefficient of the interaction of labor intensity and abatement expenditure to be significant. Also the pure Pollution Haven effect that predicts a negative effect of abatement expenditure on production emerges to be stronger with this specification compared to the more common formulation where the interaction term is absent. Alternate specifications find the results to be robust and significant.

Suggested Citation

  • Bidisha Lahiri, 2015. "Role of labor intensity interaction in the relation between abatement expenditure and production," Economics Bulletin, AccessEcon, vol. 35(1), pages 407-413.
  • Handle: RePEc:ebl:ecbull:eb-14-00239
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I1-P45.pdf
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    References listed on IDEAS

    as
    1. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
    2. Victoria I. Umanskaya & Edward B. Barbier, 2008. "Can Rich Countries Become Pollution Havens?," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 627-640, September.
    3. Bidisha Lahiri, 2012. "Input Intensity: A Missing Link between Production, Trade Patterns, and Environmental Standards," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 108-118, February.
    4. Arik Levinson & M. Scott Taylor, 2008. "Unmasking The Pollution Haven Effect," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 223-254, February.
    5. Edward Manderson & Richard Kneller, 2012. "Environmental Regulations, Outward FDI and Heterogeneous Firms: Are Countries Used as Pollution Havens?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 51(3), pages 317-352, March.
    6. repec:clg:wpaper:2008-02 is not listed on IDEAS
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    More about this item

    Keywords

    sector-specific inputs; short horizon; abatement expenditure; production;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • F1 - International Economics - - Trade

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