Environmental tax evasion as a determinant of the Porter and pollution haven hypotheses in a corrupt political system

The Porter hypothesis is not very statistically significant, especially in developing countries. This is likely because it overlooks environmental-policy-related bribes, and reducing the regulatory cost burden through bribes can encourage innovation. Moreover, the more competitive are the international markets, the more likely is it for firms to bribe officials in making export decisions. This study identifies a theoretical mechanism for this hypothesis by analyzing the effects of trade environmental policies and bribes associated with tax evasion on pollution, growth, and productivity in an R&D-based growth model considering exporting firms that engage in environmental tax evasion. The analysis yields a weak Porter hypothesis wherein an increase in environmental tax for exporting firms leads to economic growth and pollution reduction. Then, the greasing-the-wheel-of-trade and sanding-the-wheel-of-trade hypotheses are compatible. The different results of trade and environmental policies’ effects on each developing country’s green innovation are likely due to the political institutions’ maturity.