Environmental Policy, Policy Uncertainty and Relocation Decisions

Abstract

We analyze the relocation decision of a monopolist under various assumptions with respect to the difference in environmental policy stringency between the home and foreign country. We show that relocation because of such a difference is highly unlikely in a model that includes uncertainty with respect to the difference in policy stringency. Relocation is however possible if the difference in other production costs is significant. We also show the potential for hysteresis-effects: once relocated, the firm will require a reduction in the difference of environmental policy stringency that is larger than the increase that lead to the relocation decision.

Keywords: Location decision, policy uncertainty, environmental compliance costs, option value

JEL Classification: F2, Q2