The role of foreign ownership in domestic environmental regulation under assymetric information
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Number in series: 28
Regulation of a polluting export industry with private information about the emission technology is analyzed under various ownership regimes. With distortive domestic taxation, a benevolent regulator will trade off allocative inefficiencies against rent offered to the industry. Foreigners’ ownership share will have an impact on the nature of the optimal regulation, through the welfare cost of rent. Some distortions from first best will be induced not only when domestic taxes are distortionary, but also when domestic taxes are non-distortionary, as long as there are some foreign owners. In a global economy, with higher foreign ownership share and more competition in the output market, optimal regulation should induce the industry to produce less of both output and net emissions. A higher foreign ownership share alone, with competiton unchanged, might lead to more pollution than under complete information. If the home government, as a response to globalization, puts more weight on domestic employment, rent extraction will be accomplished by inducing less pollution abatement, causing more harm on the local environment than under complete information.
D62, D82, H23, L51
Asymmetric information, environmental regulation, foreign ownership.