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The Role of Investment in Environmental Lobbying Contests

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Abstract

This paper establishes that a lobbying stage following investment decisions regarding abatement technology may imply a positive strategic effect of investment, pointing to relatively more investment in pollution abatement technologies than without lobbying. The intuition is that polluting firms may choose to implement more advanced abatement technology as a credible commitment device in order to lower the investment of environmentalists in the lobbying contest that will ultimately determine whether or not an emissions tax is introduced.

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Notes

  1. Early treatments of the monopolistic polluter including Barnett (1980) and Endres (1978) focus on the optimal level of the environmental tax.

  2. The negative strategic effect may be identified as the second term on the right-hand side of equation (11b) in Damania (2001).

  3. The possibility that more advanced abatement technology need not decrease the level of pollution is also discussed in the recent literature on the influence of improvements in abatement technology on marginal abatement costs. See, for example, Amir et al. (2008), Bauman et al. (2008) or Endres and Friehe (2011).

  4. We assume that the level of income is sufficient to allow for the interior solution.

  5. This implies that the level of the tax will not be first-best given the circumstances. However, in practice pollution tax rates are rarely set at efficient levels (e.g., Fredriksson 1997).

  6. We assume that the second-order conditions are satisfied.

  7. Stage 2 may also be interpreted along the lines of Hillman and Ursprung (1988), whereby political candidates seeking election rely on campaign contributions from lobbying groups.

  8. The influence of changes in the monopolist’s equilibrium effort level on expected profits does not appear in (32) because such changes have no effect, by application of the envelope theorem.

  9. When \(G\rightarrow .5\), the optimal investment will be equal to zero for the given levels of the other parameters.

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Authors and Affiliations

  1. Center for Advanced Studies in Law and Economics, University of Bonn, Adenauerallee 24-42, 53113 , Bonn, Germany

    Tim Friehe

  2. CESifo, Munich, Germany

    Tim Friehe

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  1. Tim Friehe
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Correspondence to Tim Friehe.

Additional information

The author is indebted to Alfred Endres, Heinrich Ursprung, and two anonymous reviewers for very helpful comments on an earlier draft of this paper.

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Friehe, T. The Role of Investment in Environmental Lobbying Contests. Environ Resource Econ 56, 337–352 (2013). https://doi.org/10.1007/s10640-013-9650-2

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