Spillovers and Taxes: What Drives Strategic Competition in Environmental Policies?
It has been widely shown in the literature that states act strategically when forming environmental policies. However, this strategic interaction could be the result of two different effects. In the hypothesis of tax competition, states strategically set environmental standards in order to attract a fixed amount of mobile capital. In a spillover model, states set environmental policies strategically in response to pollution that spills over from other states. The previous literature has been unable to separate the two effects. Using weighting matrices specifically tailored to each form of competition, I am able to separate the effects, showing that tax competition explains 38% of interaction in environmental policy while spillover competition explains 62%.
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