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

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 competi- tion. 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.