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Domestic Environmental Policy under Asymmetric Information: The role of foreign ownership, outside options and market power

  • Vislie, Jon

    ()

    (Dept. of Economics, University of Oslo)

We analyse environmental policy under asymmetric information in a context where a homepolluting firm, selling its final output solely in a foreign market with some market power, has an option to bypass domestic regulation through setting up new plants in a jurisdiction offering lenient environmental standards. The hidden characteristics are emission intensity and outside option, assumed perfectly correlated, so that the firm has a type-dependent reservation utility. There is mixed ownership to the firm; a fraction is owned by foreigners whose welfare does not enter the home government’s objective function. The home government has a limited set of policy instruments; in fact only net emissions can be taxed. The familiar trade-off between efficiency and rent extraction will involve over-pollution, with (possibly) a subset of the most emission-intensive firm types being induced to relocate. This effect is reinforced by increased foreign ownership, as the cost of leaving rent then increases. (Ownership has no real impact under complete information.) Weaker market power, due to increased competition at the world market, will work in the same direction, but now there is a counteracting effect due to a lower outside option.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2003/Memo-19-2003.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 19/2003.

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Length: 34 pages
Date of creation: 10 Jun 2003
Date of revision:
Handle: RePEc:hhs:osloec:2003_019
Contact details of provider: Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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  1. Laffont, Jean-Jacques, 1993. "Regulation of Pollution with Asymmetric Information," IDEI Working Papers 24, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. 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.
  3. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
  4. Baron, David P., 1985. "Regulation of prices and pollution under incomplete information," Journal of Public Economics, Elsevier, vol. 28(2), pages 211-231, November.
  5. Vislie,J., 2001. "Environmental regulation, asymmetric information and foreign ownership," Memorandum 07/2001, Oslo University, Department of Economics.
  6. Armstrong, Mark, 1999. "Optimal Regulation with Unknown Demand and Cost Functions," Journal of Economic Theory, Elsevier, vol. 84(2), pages 196-215, February.
  7. Rauscher, Michael, 1994. "Environmental Regulation and the Location of Polluting Industries," CEPR Discussion Papers 1032, C.E.P.R. Discussion Papers.
  8. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Dijkstra, Bouwe R., 2003. "Direct regulation of a mobile polluting firm," Journal of Environmental Economics and Management, Elsevier, vol. 45(2), pages 265-277, March.
  10. Hoel, Michael, 1997. " Environmental Policy with Endogenous Plant Locations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 241-59, June.
  11. Laffont, Jean-Jacques, 1996. "Industrial policy and politics," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 1-27.
  12. Motta, Massimo & Thisse, Jacques-Francois, 1994. "Does environmental dumping lead to delocation?," European Economic Review, Elsevier, vol. 38(3-4), pages 563-576, April.
  13. James R. Markusen & Edward R. Morey & Nancy Olewiler, 1991. "Environmental Policy When Market Structure and Plant Locations are Endo-genous," NBER Working Papers 3671, National Bureau of Economic Research, Inc.
  14. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
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