On interjurisdictional competition and environmental federalism

Herein we construct a competitive interjurisdictional model that reconciles two recent exceptions to the race to the bottom (J. Publ. Econ. 35 (1988) 333–354; J. Urban Econ. 37 (1995) 290–310). Our results suggest that since environmental rents from local production are likely not captured 100 percent by local residents, devolved command and control environmental regulation is inefficient. Moreover, faced with the reality of fiscal constraints, local governments adopt property tax structures that serve to compound inefficiencies. Within such a ‘second best’ setting, if a jurisdiction underprovides non-environmental public goods and jurisdictional capital productivity and emissions are strong complements, a race to the bottom equilibrium is supported.