Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous

Daniel L. Millimet · Jayjit Roy

416 citations0/0 files storedJournal of Applied Econometrics

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Energy, Environment, Economic Growth International Business and FDI Climate Change Policy and Economics

Abstract

The pollution haven hypothesis (PHH) posits that production within polluting industries will shift to locations with lax environmental regulation. While straightforward, the existing empirical literature is inconclusive owing to two shortcomings. First, unobserved heterogeneity and measurement error are typically ignored due to the lack of a credible, traditional instrumental variable for regulation. Second, geographic spillovers have not been adequately incorporated into tests of the PHH. We overcome these issues utilizing two novel identification strategies within a model incorporating spillovers. Using US state-level data, own environmental regulation negatively impacts inbound foreign direct investment. Moreover, endogeneity is both statistically and economically relevant. Copyright © 2015 John Wiley & Sons, Ltd.

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References

1965The Logic of Collective Action 1966The Logic of Collective Action.2006The Log of Gravity 1995Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?2004Trade, Growth, and the Environment 1999Theories of Tax Competition 2006Political risk, institutions and foreign direct investment 2004Trade, Growth, and the Environment

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