Environmental Policy And Firm Relocation: The Case Of U.S.-Mexico

Abstract

The paper studies the effect of stringent environmental policy on domestic firms' location decisions, especially in the context of a bilateral trade agreement. The main variables included are market size, trade barriers, and fixed costs of establishing abroad. The results show that parameter assumption in the inverse demand function matter. In addition, changes in model variables yield both intuitive and some less intuitive results. For example, predictions on firm movement following economic integration are not as clear as might be expected. The results are discussed in the context of U.S.-Mexico economic integration.