Absentee Ownership of Immobile Factors and Environmental Policies in a Federation

Abstract

This paper studies the effects of absentee ownership of immobile factors on environmental policy of a jurisdiction in a federation. An increase in emissions in a jurisdiction increases factor incomes, but part of the increased factor incomes goes to absentee owners while only the residents of the jurisdiction bear the full disutility. In addition, the increase in emissions in a jurisdiction attracts capital and decreases capital in other jurisdictions, reducing the incomes that the residents of the jurisdiction earn from owning immobile factors in other jurisdictions. Absentee ownership thus reduces the marginal benefit of an increase in emissions while it leaves the marginal cost unaffected from the jurisdiction’s perspective. As a consequence, absentee ownership makes environmental policy of a jurisdiction too stringent relative to the efficient level. The paper also considers the effects of absentee ownership on environmental policy when goods trade is allowed.