Endogenous policy choice: The case of pollution and growth

What determines the relationship between pollution and growth? Are the forc es that explain the behavior over time of these quantities potentially usef ul for understanding more generally the relationship between policies and g rowth? In this paper we make a first attempt to analyze the equilibrium beh avior of two quantities-the level of pollution and the level of income- in a setting in which societies choose, via voting, how much to regulate pollu tion. Our major finding is that, consistent with the evidence, the relation ship between pollution and growth need not be monotone, and that the precis e equilibrium nature of the relationship between the two variables depends on whether individuals vote over effluent charges or directly restrict the choice of technology. Moreover, our analysis of the pollution problem sugge sts that, more generally, endogenous policy choices should be taken serious ly as potential sources of heterogeneity when cross-country differences in economic performance are studied. (C) 2001 Academic Press.