Environmental Policy and Industrial Competitiveness: The Pollution‐Haven Hypothesis Reconsidered

Abstract

The pollution‐haven hypothesis suggests that strict environmental standards reduce domestic producers’ competitiveness and result in relocation to countries with more lenient standards. This paper examines the question of whether relocation is always caused by reduced competitiveness at home. By using a signaling approach, it is shown that relocation can be undertaken for purely strategic reasons. Relocation is the producer’s tool of indirect rent‐seeking to convince the policymaker to refrain from a further tightening of environmental control. It is also shown that trade liberalization increases the probability of strategic relocation.

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