Three essays on inter-jurisdictional competition in industrial and environmental policy

The purpose of this dissertation is to answer some questions associated with jurisdictions' choices of their industrial and environmental policies in a setting in which capital is cross-jurisdictionally mobile and jurisdictions face of competing goals: financing public goods, regulating pollution, and creating market conditions favorable for private production. The modeling framework is motivated by insights from the public finance literature on inter-jurisdictional tax competition; the environmental economics literature on the "race to the bottom," and the "double-dividend" literature in environmental economics and public finance, which explores the efficiency consequences of tax shifting from conventional inputs to pollution. Since none of these three literatures arrives at robust and consistent conclusions, further study is warranted. A set of parsimonious static general equilibrium models for various policy scenarios is developed and analyzed in the first essay of the dissertation. General functional forms are employed for better generalization of the results. The particular answers we propose include comparison of the optimal tax levels at different policy scenarios, optimal size of government, conditions for observing of the "race" and "double-dividend". The second essay presents the empirical study which uses a US-panel data to interpret differences in jurisdictional tax levels and the level-of-regulation observed among the states. Switching spatial econometric models are analyzed among others. It is shown that strategic interaction takes place between states in the setting of tax levels, following, in some cases, by the "race-to-the-bottom". The behavioral economic context is used to approach inter-jurisdictional competition in the third essay. Employing quantal response equilibrium (QRE) modeling framework, a series of numerical simulations is conducted to analyze how bounded rationality of the decision-maker or nosiness of the decision-making process affects the choice of optimal policy strategy when jurisdictions compete with each other for the resources. The dissertation concludes with policy implications and recommendations.