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Spillovers and Taxes: What Drives Strategic Competition in Environmental Policies?

  • B. Andrew Chupp

    ()

    (Department of Economics, Illinois State University)

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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File URL: http://economics.illinoisstate.edu/RePec/Papers/20110402.pdf
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File Function: First version, 2011
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Paper provided by Illinois State University, Department of Economics in its series Working Paper Series with number 20110402.

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Length: 19 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:ils:wpaper:20110402
Contact details of provider: Web page: http://economics.illinoisstate.edu

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  1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
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  3. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
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  7. Kunce, Mitch & Shogren, Jason F., 2002. "On Environmental Federalism and Direct Emission Control," Journal of Urban Economics, Elsevier, vol. 51(2), pages 238-245, March.
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  9. Federico Revelli, 2002. "Testing the taxmimicking versus expenditure spill-over hypotheses using English data," Applied Economics, Taylor & Francis Journals, vol. 34(14), pages 1723-1731.
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  15. 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.
  16. Daniel L. Millimet & John A. List, 2003. "A Natural Experiment on the 'Race to the Bottom' Hypothesis: Testing for Stochastic Dominance in Temporal Pollution Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 395-420, 09.
  17. Thomas B. Fomby & Limin Lin, 2006. "A Change Point Analysis of the Impact of "Environmental Federalism" on Aggregate Air Quality in the United States: 1940--98," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 109-120, January.
  18. 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.
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  21. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  22. Glazer, Amihai, 1999. "Local regulation may be excessively stringent," Regional Science and Urban Economics, Elsevier, vol. 29(5), pages 553-558, September.
  23. Federico Revelli, 2001. "Spatial patterns in local taxation: tax mimicking or error mimicking?," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1101-1107.
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