Adversarial Legalism, Transaction Costs, and the Industrial Flight Hypothesis

Abstract

"There has been considerable debate in regulatory policy circles concerning the industrial flight hypothesis: increases in environmental regulatory compliance costs will, at the margin, drive investment overseas. The literature on environmental regulations and industrial competitiveness, however, provides little solid empirical support for the hypothesis. There are several possible explanations for the weak empirical evidence. First, the available data are limited. Second, the costs of stricter environmental regulation may be trivial compared to other cost considerations facing the firms, or may be nonbinding because the regulations are not enforced. Third, the costs of regulation may be offset by productivity and innovation benefits which accrue to firms as a result of their compliance efforts: the so-called 'green gold' effect. Fourth, the predicted effect of the hypothesis, i.e., that competitiveness will fall as the cost of regulation rises, may hold for some firms and some industries, while other firms and other industries may be unaffected or experience the opposite effect. Thus aggregate level analysis of the effects of increased environmental regulation have revealed insignificant results; perhaps the industrial flight and the green gold effects negate each other; or perhaps firms for which the hypothesis holds are overwhelmed by unaffected firms. Each of these explanations may have some merit. In this paper, however, we explore a fifth possibility arising from the exclusion of regulatory process costs from total compliance costs."