Centralized versus decentralized taxation of mobile polluting firms

We consider a world in which a mobile polluting firm must locate in one of two regions. The regions differ in two dimensions: their marginal cost of p ollution and the production cost of the firm. It is shown that under incomp lete information on regional marginal costs of pollution, fiscal competitio n may lead to the sub-optimal location of the firm. We also show that under incomplete information, a sub-optimal location is less likely under centra lized than under decentralized taxation. (C) 2001 Elsevier Science B.V. All rights reserved.