Environmental Policy and Capital Movements: The Role of Government Commitment

Renström, Thomas I and Laura Marsiliani

No 3727, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 characterized by a lower labour tax, higher environmental tax and less capital moving abroad than in the no-commitment equilibrium. Furthermore, given the degree of commitment, more equal societies are characterized by tougher environmental policy and less capital moving abroad.

Keywords: Environmental policy; Capital movements; Time-inconsistent fiscal policy; Income inequality; Politico-economic equilibrium; Human capital (search for similar items in EconPapers)
JEL-codes: F20 H21 H23 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-ifn
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