Forthcoming in Journal of Environmental Economics and Management

PDF Document (January 2005): http://www.valt.helsinki.fi/staff/haavio/migration2.pdf

Abstract: Recent research has shown that perfect household mobility can serve as a disciplinary mechanism inducing national policymakers to internalize interregional externalities caused by transboundary pollution. This paper develops a differential game to illustrate that the result is not necessarily robust when migration costs and explicit dynamics are introduced. The paper shows that if governments constantly reoptimize, imperfect household mobility leads to a tragedy of the commons, and individual countries overemit even when pollution is purely local. Moreover, these dynamic externalities get worse as the degree of household mobility increases, and there is a qualitative difference between almost-perfect and perfect mobilty, that is, a discontinuity at zero migration costs.