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Developing Country Second-Mover Advantage in Competition over Environmental Standards and Taxes

  • Valeska Groenert
  • Benjamin Zissimos

We show that, in competition between a developed country and a developing country over environmental standards and taxes, the developing country may have a ‘second-mover advantage.’ In our model, firms do not unanimously prefer lower environmental-standard levels. We introduce this feature to an otherwise familiar model of fiscal competition. Four distinct outcomes can be characterized by varying the marginal cost to firms of an environmental externality: (1) the outcome may be efficient; (2) the developing country may be a ‘pollution haven’ - a place to escape excessively high environmental standards in the developed country; (3) the developing country may ‘undercut’ the developed country and attract all firms; (4) the developed country may be a pollution haven.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3686.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3686
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  1. Davies, Ronald B. & Ellis, Christopher J., 2007. "Competition in taxes and performance requirements for foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1423-1442, August.
  2. Levinson, Arik, 1997. "A Note on Environmental Federalism: Interpreting Some Contradictory Results," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 359-366, July.
  3. JUSTMAN, Moshe & THISSE, Jacques-François & VAN YPERSELE, Tanguy, . "Taking the bite out of fiscal competition," CORE Discussion Papers RP 1598, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Haufler, Andreas & Wooton, Ian, 1997. "Tax competition for foreign direct investment," Discussion Papers, Series II 329, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  5. Josh Ederington, Arik Levinson, and Jenny Minier, 2004. "Trade Liberalization and Pollution Havens," Working Papers gueconwpa~04-04-05, Georgetown University, Department of Economics.
  6. Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
  7. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  8. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2003. "Agglomeration Effects and the Competition for Firms," Cahiers de recherche 0324, CIRPEE.
  9. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
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