Both the theory of environmental regulation and the theory of international trade generally assume fixed plant locations that are exogenous to policy changes. The analysis tends to focus on firms' marginal price and output responses to policy changes, such as emission controls or tariff rates. It is the nature of these models that responses are small and continuous, implying that optimal tax or tariff rates can be calculated. However, it is well understood by policy makers that plants are of discrete size due to scale economies, and that plant location decisions are endogenous to cost differentials across regions or countries. Regional and increasingly national governments are explicitly taking the endogeneity of these location decisions into account in designing policies which attract firms or which may raise the costs of local production. To date, economic theory and empirical work has shed little on these important policy questions. The purpose of this project is to conduct both a theoretical and empirical analysis of environmental and trade policies when the location decisions of large manufacturing, utility, or resource- based plants are endogenous. Attention well be focused on cases where the firm in question can make choices between politically independent locations, to allow for the possibility of inefficient political competition between regions. Non- cooperative outcomes can then serve as a benchmark from which to evaluate the gains from policy coordination. Models will be constructed to analyze the effects of trade liberalization between the U.S. and Mexico, and tougher environmental policies in the U.S. on the North American location of plants in the auto and chemical industries.
