The Role of Government Commitment for Environmental Policy and Capital Movements

This paper explores the relationship between environmental protection and international capital , when tax policy is endogenous (through voting). A two-period general equilibrium of a small open economy is specified to compare the effects of two different constitutions (commitment or no commitment in tax policy), as well as income inequality. Under the commitment , the equilibrium is characterised by a lower labour tax, higher environmental tax and capital locating abroad than in the no-commitment equilibrium. Furthermore, given the degree commitment, more equal societies are characterised by tougher environmental policy and less locating abroad.