bottom (RTB)". However, empirical evidence of the PHH and subsequent RTB predictions is not at all conclusive. Early cross sectional analyses did not find environmental regulation to have a statistically significant effect on firm location, while recent panel data studies<sup>6</sup> do find evidence of PHH. In their comprehensive review of the empirical literature, Brunnermeier and Levinson (2004) conclude that although such studies can shed light on the sensitivity of capital and goods flows to regional differences in regulation, they cannot demonstrate that governments purposely set suboptimal environmental regulations to attract business. Antweiler et al. (2001) analyze the above outlined trade environment composition effect and find evidence that international trade creates only small changes in pollution concentrations and that the opposing technique and scale effects result in a net reduction of pollution. Cole et al. (2003) similarly take per capita income as a proxy for stringency of environmental regulation and try to reproduce the results of Antweiler et al. (2001). They similarly find evidence for both the environmental regulation and factor endowment effects for SO2, however, these results do not hold for other pollutants and the pollution reducing net effect of trade is not found for per capita emissions while it seems to exist for pollution intensities. Furthermore, Birdsall and Wheeler (1993) found that in Latin America pollution intensive industries tend to be located in those countries most protected from trade, while openness brings higher international standards.

Besides the trade-environment relationship, a development-regulation nexus has been approached under the label of the Environmental Kuznets Curve, which posits an inverted U relationship between income per capita and pollution. Carson (2010) concisely states that there is robust evidence that pollution levels fall at high income levels, however, different political jurisdictions can follow very different paths, income may influence pollution in slow and subtle ways<sup>7</sup> , and it may be hard to disentangle growth from diffusion of clean technology. Along these lines and according to empirical work by Dasgupta et al. (1995) there exists a positive correlation between development indicators such as income per capita, security of property rights, or general development of the legal or regulatory system, and (performance of) environmental regulation and overall environmental quality. Hettige, Lucas and Wheeler (1992) add evidence of an industrial displacement effect where since 1970 lower income countries were subject to a stronger positive long term trend in industrial emissions relative to GDP and manufacturing output than their high income counterparts. While prior evidence postulated a relatively small cost of environmental regulation, they conjecture that eventually growing concerns over legal liability and/or reputational damage may have contributed to the above finding.

When it comes to Regulatory Race to the Bottom, there is the initial claim that firms actually locate production in close proximity to important sales markets (including developing and emerging market economies) and exports actually constitute a minor share of total foreign production (US Department of Commerce Study 1996). This would

> 6 controlling for 1) unobserved heterogeneity in country or industry characteristics that are correlated with regulation or economic performance and/or 2) endogeneity of regulatory stringency due to (two way) causality between trade and regulation

> 7 I.e. rather than thinking about the curve as a reduced form relationship between income and pollution, one could imagine its structural counterpart, where income directly affects demand and supply factors, which in turn influence pollution.

Page **4** of **27**