The authors are grateful to Brian Copeland, Gabriel Felbermayr, Scott Taylor, and one anonymous referee, as well as participants at the Annual Meeting of the German Economic Association in Göttingen, the ETSG Annual Conference in Leuven, the 14th ZEW Summer Workshop for Young Economists on Trade and the Environment in Mannheim, and the Economic Geography and International Trade Research Meeting in Berlin for helpful comments and suggestions.
Trade and the Environment: The Role of Firm Heterogeneity
Article first published online: 2 DEC 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 22, Issue 2, pages 209–225, May 2014
How to Cite
Kreickemeier, U. and Richter, P. M. (2014), Trade and the Environment: The Role of Firm Heterogeneity. Review of International Economics, 22: 209–225. doi: 10.1111/roie.12092
- Issue published online: 1 APR 2014
- Article first published online: 2 DEC 2013
In this paper, we derive a new effect of trade liberalization on the quality of the environment. We show that in the presence of heterogeneous firms, the aggregate volume of emissions is influenced by a reallocation effect resulting from an increase in the relative size of more productive firms. The relative importance of this reallocation effect and the scale effect well-known from the literature is affected by the emission intensity at the firm level. Domestic emissions decrease as a result of a unilateral tariff reduction if and only if firm-specific emission intensity decreases strongly with increasing firm productivity. As a result of the induced change in foreign emissions, domestic pollution can increase even if domestic emissions decrease.