Capital mobility and environmental standards: Racing to the bottom with multiple tax instruments |
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Authors: | Jinyoung Kim John Douglas Wilson |
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Institution: | aDepartment of Economics, Indiana University, Bloomington, Wylie Hall, Indiana 47405, USA;bDepartment of Social Studies, Kangwon National University, Kangwon-do, 200-701, South Korea |
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Abstract: | This paper investigates the possibility of a ‘race to the bottom,’ under which intergovernmental competition for mobile capital leads to inefficiently lax environmental standards. A model is constructed in which independent welfare-maximizing governments regulate pollution emissions from production activities, while taxing residential labor and mobile capital to finance public good expenditures. A race is shown to exist in the sense that a ‘central planner’ could improve welfare in every country by requiring that each government tighten its environmental standards. The analysis also shows that the tax-financed public good is underprovided in equilibrium, but it is argued that this problem may be less severe than the race-to-the-bottom problem. |
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Keywords: | Capital mobility Capital taxation Labor taxation Environmental standards Race to the bottom |
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