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


  • We are grateful for the advice we received from Myrna Wooders on this project. Indeed, she was a co-author on an earlier working paper version that had the same title but a different model. We would like to thank Robin Boadway, Rick Bond, Sam Bucovetsky, Katherine Cuff, Amrita Dhillon, Will Strange, and three anonymous referees for detailed comments and/or conversations about this paper. Thanks are also due for comments from participants at the Workshop on Stability in Competition, CORE, Louvain la Neuve, a European Science Foundation Workshop, Paris 1, a seminar at the MPI in Bonn, the Social Choice and Welfare Meeting in Istanbul, a Canadian Public Economics Group Meeting at the University of Toronto, and seminars at the University of Warwick and Vanderbilt University. Funding from the Center for the Americas at Vanderbilt University and from the Spanish Ministry of Science and Innovation through grant “Consolidated Group-C” ECO2008-04756 is gratefully acknowledged.


We show that, in competition between a developed country and a developing country over environmental standards and taxes, the developing country may have a “second-mover advantage.” In our model, firms do not unanimously prefer lower environmental standard levels. We introduce this feature to an otherwise familiar model of fiscal competition. Four distinct outcomes can be characterized by varying the marginal cost to firms of an environmental externality: (1) the outcome may be efficient; (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 firms; (4) the developed country may be a pollution haven.