CAPITAL MOBILITY AND ENVIRONMENTAL STANDARDS - RACING TO THE BOTTOM WITH MULTIPLE TAX INSTRUMENTS

This paper investigates the possibility of a 'race to the bottom,' und er which intergovernmental competition for mobile capital leads to ine fficiently lax environmental standards. A model is constructed in whic h independent welfare-maximizing governments regulate pollution emissi ons from production activities, while taxing residential labor and mob ile capital to finance public good expenditures, A race is shown to ex ist in the sense that a 'central planner' could improve welfare in eve ry 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 ma y be less severe than the race-to-the-bottom problem. (C) 1997 Elsevie r Science B.V.