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The role of government commitment for environmental policy and capital movements.

By L. Marsiliani and T. I. Renström


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

Topics: Time consistency, Taxation, Environmental policy, Political economy, International.
Publisher: Berkeley Electronic Press
Year: 2006
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