Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?* Matthew A. Cole University of Birmingham, Birmingham B15 2TT, England m.a.cole@bham.ac.uk Robert J. R. Elliott University of Birmingham, Birmingham B15 2TT, England r.j.elliott@bham.ac.uk Per G. Fredriksson University of Louisville, Louisville, KY 40292, USA per.fredriksson@louisville.edu Abstract We suggest a novel perspective on the relationship between the stringency of environmental policies and foreign direct investment (FDI). We develop a political economy model with imperfect product market competition where local and foreign firms jointly lobby the local government for a favorable pollution tax. FDI is found to affect environmental policy, and the effect is conditional on the local government’s degree of corruptibility. If the degree of corruptibility is sufficiently high (low), FDI leads to less (more) stringent environmental policy, and FDI thus contributes to (mitigates) the creation of a pollution haven. Our empirical results using panel data from 33 countries support the predictions of the model. Keywords: Pollution haven hypothesis; FDI; environmental policy; political economy; corruption JEL classification: F18; F 21; D72; D73; Q28 * We would like to thank three helpful referees, Sangeeta Bansal, Jayasri Dutta, Angeliki Kourelis, John List, Daniel Millimet and participants at presentations at Rice University, SMU, and the EAERE meetings in Budapest for helpful comments and discussions, and Jakob Svensson for some of the data. This paper was started while Fredriksson visited the Department of Economics, University of Gothenburg, whose hospitality is greatly appreciated. Cole and Elliott gratefully acknowledge the support of ESRC grant number RES-000-22-0016 and Leverhulme Trust grant number F/00094/AG. Fredriksson gratefully acknowledges sup- port from the Malmsten Foundation and the University of Gothenburg Jubilee Fund (Elof Hansson’s Foundation Gift), and travel funds from SMU. The usual disclaimers apply. Scand. J. of Economics 108(1), 157–178, 2006 DOI: 10.1111/j.1467-9442.2006.00439.x # The editors of the Scandinavian Journal of Economics 2006. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.