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dc.contributor.authorMillimet, Daniel L.en_US
dc.contributor.authorRoy, Jayjiten_US
dc.description.abstractThe validity of existing empirical tests of the Pollution Haven Hypothesis (PHH) is constantly under scrutiny due to two shortcomings. First, the issues of unobserved heterogeneity and measurement error in environmental regulation are typically ignored due to the lack of a credible, traditional instrumental variable. Second, while the recent literature has emphasized the importance of geographic spillovers in determining the location choice of foreign investment, such spatial effects have yet to be adequately incorporated into empirical tests of the PHH. As a result, the impact of environmental regulations on trade patterns and the location decisions of multinational enterprises remains unclear. In this paper, we circumvent the lack of a traditional instrument within a model incorporating geographic spillovers utilizing three novel identification strategies. Using state-level panel data on inbound U.S. FDI, relative abatement costs, and other determinants of FDI, we consistently find (i) evidence of environmental regulation being endogenous, (ii) a negative impact of own environmental regulation on inbound FDI in pollution-intensive sectors, particularly when measured by employment, and (iii) larger effects of environmental regulation once endogeneity is addressed. Neighboring environmental regulation is not found to be an important determinant of FDI.en_US
dc.publisherInstitute for the Study of Labor (IZA) Bonnen_US
dc.relation.ispartofseriesDiscussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5911en_US
dc.subject.keywordforeign direct investmenten_US
dc.subject.keywordenvironmental regulationen_US
dc.subject.keywordinstrumental variablesen_US
dc.subject.keywordcontrol functionen_US
dc.titleThree new empirical tests of the pollution haven hypothesis when environmental regulation is endogenousen_US
dc.typeWorking Paperen_US
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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