The Role of Government Commitment for Environmental Policy and Capital Movements

Marsiliani Laura () and Renström Thomas I ()
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Marsiliani Laura: Dept. of Economics, University of Durham
Renström Thomas I: Dept. of Economics, University of Durham, and CEPR

The B.E. Journal of Macroeconomics, 2007, vol. 6, issue 3, 29

Abstract: This paper explores the relationship between environmental protection and international capital movements, when tax policy is endogenous (through voting). A two-period general equilibrium model of a small open economy is specified to compare the effects of two different constitutions (commitment or no commitment in tax policy), as well as income inequality. Under the commitment regime, the equilibrium is characterised by a lower labour tax, higher environmental tax and less capital locating abroad than in the no-commitment equilibrium. Furthermore, given the degree of commitment, more equal societies are characterised by tougher environmental policy and less capital locating abroad.

Keywords: time consistency; taxation; environmental policy; political economy; international capital movements (search for similar items in EconPapers)
Date: 2007
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DOI: 10.2202/1534-5998.1229

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