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Three New Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous

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  • Daniel L. Millimet
  • Jayjit Roy

Abstract

The validity of existing empirical tests of the Pollution Haven Hypothesis (PHH) is constantly under scrutiny due to two shortcomings. First, the issues of unobserved heterogeneity and measurement error in environmental regulation are typically ignored due to the lack of a credible, traditional instrumental variable. Second, while the recent literature has emphasized the importance of geographic spillovers in determining the location choice of foreign investment, such spatial e ects have yet to be adequately incorporated into empirical tests of the PHH. As a result, the impact of environmental regulations on trade patterns and the location decisions of multinational enterprises remains unclear. In this paper, we circumvent the lack of a traditional instrument within a model incorporating geographic spillovers utilizing three novel identi cation strategies. Using state-level panel data on inbound U.S. FDI, relative abatement costs, and other determinants of FDI, we consistently nd (i) evidence of environmental regulation being endogenous, (ii) a negative impact of own environmental regulation on inbound FDI in pollution-intensive sectors, particularly when measured by employment, and (iii) larger e ects of environmental regulation once endogeneity is addressed. Neighboring environmental regulation is not found to be an important determinant of FDI. Key Words: Foreign Direct Investment, Environmental Regulation, Spillovers, Instrumental Variables, Control Function, Heteroskedasticity

Suggested Citation

  • Daniel L. Millimet & Jayjit Roy, 2011. "Three New Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous," Working Papers 11-10, Department of Economics, Appalachian State University.
  • Handle: RePEc:apl:wpaper:11-10
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    Cited by:

    1. Faria, João Ricardo & Wang, Le & Wu, Zhongmin, 2012. "Debts on debts," The North American Journal of Economics and Finance, Elsevier, vol. 23(2), pages 203-219.
      • Joao Ricardo Faria & Le Wang & Zhongmin Wu, 2009. "Debts on debts," Working Papers 2009/7, Nottingham Trent University, Nottingham Business School, Economics Division.
    2. Hille, Erik & Althammer, Wilhelm, 2015. "Measuring climate policy stringency: A shadow price approach using energy prices," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112804, Verein für Socialpolitik / German Economic Association.
    3. Roy, Jayjit & Yasar, Mahmut, 2015. "Energy efficiency and exporting: Evidence from firm-level data," Energy Economics, Elsevier, vol. 52(PA), pages 127-135.
    4. Hering, Laura & Poncet, Sandra, 2014. "Environmental policy and exports: Evidence from Chinese cities," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 296-318.
    5. Sunghoon Chung, 2012. "Environmental Regulation and the Pattern of Outward FDI: An Empirical Assessment of the Pollution Haven Hypothesis," Departmental Working Papers 1203, Southern Methodist University, Department of Economics.
    6. Somlanare Romuald KINDA & Pascale COMBES MOTEL & Jean-Louis COMBES, 2014. "Do Environmental Policies Hurt Trade Performance?," Working Papers 201404, CERDI.
    7. Chung, Sunghoon, 2014. "Environmental regulation and foreign direct investment: Evidence from South Korea," Journal of Development Economics, Elsevier, vol. 108(C), pages 222-236.
    8. repec:spr:jopoec:v:31:y:2018:i:3:d:10.1007_s00148-017-0672-x is not listed on IDEAS
    9. Abay Mulatu & Ada Wossink, 2014. "Environmental Regulation and Location of Industrialized Agricultural Production in Europe," Land Economics, University of Wisconsin Press, vol. 90(3), pages 509-537.
    10. Yilmaz BAYAR & Ömer Faruk OZTURK, 2016. "Trade Openness and Environmental Pollution in Emerging Market Economies," Eurasian Eononometrics, Statistics and Emprical Economics Journal, Eurasian Academy Of Sciences, vol. 3(3), pages 33-42, January.
    11. Lu, Yi & Wu, Mingqin & Yu, Linhui, 2012. "Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China," MPRA Paper 38787, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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