Global Externalities, Local Policies, and Firm Selection

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How to fight global problems with local tools? When only firms know what externality-producing activities can be relocated, policies shape the location distribution of firm types with different social values. We find that, because of this selection effect, the optimal local policies confront firms' mobility with elevated corrective externality prices, in contrast with the common remedies for the relocation risk. Our mechanism incentivizes also moving firms to limit the externality, and it influences strategically the distribution of moving firms that comply with policies elsewhere. The magnitude of these effects is illustrated by a quantification for the key sectors in the European Union emissions trading system.

Original languageEnglish
Pages (from-to)1231-1275
Number of pages45
JournalJournal of the European Economic Association
Issue number3
Early online date14 Jan 2022
Publication statusPublished - Jun 2022
MoE publication typeA1 Journal article-refereed


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