Developing Country Second-Mover Advantage in Competition Over Environmental Standards and Taxes

Abstract

We show that, in competition between a developed country and a developing country over environmental standards and taxes, the developing country may have a 'secondmover advantage.' In our model, …rms do not unanimously prefer lower environmentalstandard levels. We introduce this feature to an otherwise familiar model of …scal competition. Four distinct outcomes can be characterized by varying the marginal cost to …rms of an environmental externality: (1) the outcome may be e¢ cient; (2) the developing country may be a 'pollution haven;' a place to escape excessively high environmental standards in the developed country; (3) the developing country may 'undercut' the developed country and attract all …rms; (4) the developed country may be a pollution haven.