Empirics and the Pollution Haven Hypothesis November 2007

# Empirics and the Pollution Haven Hypothesis November 2007 -...

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Empirics and the Pollution Haven Hypothesis (PHH) November 10, 2007

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Empirical questions related to PHH Do investment flows respond to differences in environmental standards? Has trade liberalization increased pollution intensity in developing countries? Have tighter standards in developed countries led to loss in pollution-intensive industries? The literature does not attempt to determine whether countries use environmental policies that are too weak, in order to attract investment or increase market share of dirty goods. That is, the literature does not attempt to uncover the motive of environmental policy.
What is a statistical model? We are interested in relation between net exports and pollution control costs. We know that net exports depend on other variables (e.g. supply of factors – remember the HOS model and Rybczynski theorem) If we have data on these variables we can estimate a relation between exports and pollution control costs, while “controlling” for other variables (e.g. supply of factors). We are (usually) interested in sign and magnitude of coefficient on pollution control costs, and on whether the coefficient is statistically significant.

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More details on statistical model (a.k.a. “regression equation”) The subscript i identifies the country and the subscript t identifies the time period. For the PPH, the dependent variable y is a measure of exports of the dirty good, the explanatory variable x is a measure of pollution control costs, z contains other explanatory variables, called “control variables” (e.g. factor endowments for the PHH); e is the equation “error”, a composite of factors that we do not observe, but which affect the dependent variable, and a component that takes into account the inherent randomness of the process. The statistical problem is to estimate the parameters, particularly beta, and determine whether it is positive and statistically different than 0. There are many technical problems: missing data, data with measurement errors, correlation between error and explanatory variables, misspecification of model…. , , i t i t it it y x z e β γ = + +
Alternatives for addressing question “Does trade harm the environment?” Theory, i.e. try to determine the likely relation between trade and the environment using logic. Theory helps you “think clearly” but is inconclusive. Case studies, i.e. finding examples where the relation appears positive or negative. These are useful, but they leave you wondering how representative the case studies are. Statistical models – these have the advantage of being based on widely accepted principles, but the data seldom exactly conforms to the statistical assumptions.

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The empirical evidence Early studies use US data to categorize industries into dirty and clean sectors (based on emissions per \$ of output, or per employee, or on abatement costs). The statistical exercise looks for link between
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## Empirics and the Pollution Haven Hypothesis November 2007 -...

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