Is environmental dumping greater when firms are footloose?
Concerns have been expressed that in a global market place with mobile capital, national governments will have incentives to set weak environmental policies ("environmental dumping") to protect the international competitiveness of their domestic firms and that these incentives are particularly strong in industries where plants may be relatively footloose so that governments are concerned to prevent "capital flight". In this paper we investigate whether the mobility of firms does indeed increase incentives for environmental dumping. We do this by taking a simple model of imperfect competition and comparing the environmental policies that would be set by non-cooperative governments for two different move structures - where governments set environmental policies after firms decide where to locate (the exogenous location case or Market Share Game) and where governments set environmental policies before firms decide where to locate (the endogenous location case or Location Game). This raises an important modelling issue for it is natural in the Market Share Game that governments would set different environmental policies depending on the number of firms that locate in their countries, and if we are to compare just the effect of different move structures then in the Location Game we should also allow governments to condition their environmental policies on the number of firms that locate in them, contrary to previous models of the Location Game where governments set a single instrument independent of the number of firms that locate in their countries. We show that the extent of environmental dumping in the Market Share Game may be greater or less than in the Location Game, depending in particular on the degree of substitution between products of the firms and hence the intensity of market competition. We also show that there is more environmental dumping in the Location Game when governments use a single instrument than when they condition their instruments on the number of firms that locate in their countries.
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