Cross-Country Policy Harmonization with Rent-Seeking

Abstract

In a reciprocal market model with imperfectly competitive firms, domestic policies will differ across countries that are economically and politically diverse. We explore the implications of this standard result with regard to harmonization of environmental policies between corrupt and non-corrupt countries. Imposing a more stringent policy on a non-corrupt government will be welfare reducing to the receiving country, but may be welfare enhancing for the imposing country. However, where environmental standards are under the control of a corrupt government, it is possible that harmonization is welfare enhancing to both countries.