The Credibility of Exit Threats: Refining the "Race to the Bottom" Debate

Abstract

This essay explores the question of whether industry mobility poses challenges to environmental protection. I review the empirical studies that are frequently invoked in the debate over a possible "race to the bottom" in environmental standards, and argue that these studies fail to focus on the test cases that would be most illuminating for this debate. I suggest that in order to gauge the risk of a "race to the bottom," it is necessary to consider the bargaining relationships that exist between states and firms. In particular, environmental protection ef­forts may be impeded if firms are able to make credible exit threats in response to increased environmental regulation. I suggest four factors according to which the credibility of potential exit threats may be estimated: size of required fixed investment; extent of product differentiation; environmental impact abatement costs as a proportion of total costs; and reliance upon a local, exhaustible natural resource.