Interest Groups, Economic Competition, and Endogenous Public Policy

A common-agency model is constructed to investigate how two interest groups – a workers' group and an environmentalists' group – affect the formation of a capital tax and an environmental policy. The political power of interest groups, which is related to the free-rider problem that they face, is crucial in deciding these policies. This paper depicts the conditions under which either NIMBY or a race to the bottom occurs. Moreover, this paper examines whether the equivalence between a pollution tax and a pollution standard is sustained despite interference from interest groups.