Convention, in the setting of
interjurisdictional economic competition, envisions a race-to-the-bottom when
decentralized jurisdictions, in their eagerness to attract commerce, introduce
policies to reduce business costs in the form of tax structures that
under-provide local public goods and lax pollution standards that lower
environmental quality. The current body of empirical evidence, however, does
not provide compelling support for the race within the context of environmental
federalism. The theoretical work presented herein debits the inventory of
literature questioning the race-to-the-bottom claim by introducing agglomeration
forces into the standard model. When agglomeration influences are weak to
moderate, the race is still on. Conversely, when agglomeration forces are
strong, fiscal competition influences are mitigated therefore providing
jurisdiction's incentives to strengthen local environmental standards.
JEL classification numbers: H73, R12, R30.
Keywords: Environmental federalism, Interjurisdictional competition,
External economies of scale.