A BEJEAP Contributions article.

Abstract

This paper develops a common agency model to analyze the strategic interaction between governments in regulating polluting multinationals. We show that when a firm has private information about its production technology relating output to pollution that is difficult to monitor, the information rent extraction behavior of non-cooperative governments will work against the "pollution haven" hypothesis in a Nash equilibrium with or without pooling. The "pollution haven" result is more likely to be reversed in a separating equilibrium than in a pooling equilibrium as a firm's output is further away from the most efficient outcome. This result provides an explanation for why many empirical studies do not support the "pollution haven" hypothesis even after controlling for private non-environmental cost differentials.

Submitted: January 16, 2004 · Accepted: May 5, 2004 · Published: May 14, 2004

Originally published in Contributions to Economic Analysis & Policy.

Recommended Citation

Wu, Xiaodong (2004) "Pollution Havens and the Regulation of Multinationals with Asymmetric Information," Contributions to Economic Analysis & Policy: Vol. 3 : Iss. 2, Article 1.
Available at: http://www.bepress.com/bejeap/contributions/vol3/iss2/art1