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Institutions, Comparative Advantage, and the Environment

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  • Joseph S. Shapiro

Abstract

This paper proposes that strong financial, judicial, and labor market institutions provide comparative advantage in clean industries, and thereby improve a country's environmental quality. Five complementary tests support this hypothesis. First, industries that depend on institutions are disproportionately clean. Second, strong institutions increase relative exports in clean industries, even conditional on environmental regulation and factor endowments. Third, an industry's complexity helps explain the link between institutions and clean goods. Fourth, a quantitative general equilibrium model indicates that strengthening a country's institutions decreases its pollution through relocating dirty industries abroad, though increases pollution in other countries. Fifth, cross-country differences in the composition of output between clean and dirty industries explain more of the global distribution of emissions than differences in the techniques used for production do. The comparative advantage that strong institutions provide in clean industries gives one under-explored reason why developing countries have relatively high pollution levels.

Suggested Citation

  • Joseph S. Shapiro, 2023. "Institutions, Comparative Advantage, and the Environment," NBER Working Papers 31768, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:31768
    Note: DEV EEE ITI PE POL
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    Cited by:

    1. Robin Sogalla & Joschka Wanner & Yuta Watabe, 2024. "New Trade Models, Same Old Emissions?," CESifo Working Paper Series 11596, CESifo.
    2. Meran Georg & Schwarze Reimund, 2025. "Unveiling Ecological Unequal Exchange: The Role of Biophysical Flows as an Indicator of Ecological Exploitation in the North-South Relations," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 19(1), pages 1-19.

    More about this item

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • F6 - International Economics - - Economic Impacts of Globalization
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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