Abstract
This paper examines the environmental effect of political connections at the individual and organizational levels. We integrate political connections at both levels in a four-stage game-theoretic framework to study the political interplay between an entrepreneur, a bureaucrat and a government. We distinguish individual-level political connections from bribery and argue that while the latter is generally more efficient for the firm aiming to reduce environmental tax payments, political connections become more appealing when the bureaucrat places a higher value on indirect non-monetary benefits. We find that individual-level political connections are associated with more emission discharges by the firm, while the effect of organizational-level political connections on emissions depends on a negative interaction effect between political connections at different levels and a positive resource-reallocation effect between abatement activities and production.
Funding source: City University of Hong Kong
Award Identifier / Grant number: 7005126
Award Identifier / Grant number: 7005290
Acknowledgements
The authors thank Jinhui Bai, Ling-Yun He, Christos Karydas, Aude Pommeret and two anonymous referees for their very helpful comments. Dr. Zhang thanks the funding supports from City University of Hong Kong (7005126 and 7005290). Regular claims apply. Dr. Haowei Yu thanks the financial support from China Postdoctoral Science Foundation (Grant number: 2020M683161).
A Discussion of Second-order Conditions
For the entrepreneur’s profit maximization at the fourth stage of the game, the second-order sufficient condition depends on the definiteness of the following Hessian matrix
We have π
LL = (p − sτθ)Y″ < 0 and π
LA = − sτθ′Y′ > 0 from Eq. (5a) and π
AL = π
LA > 0 by Young’s Theorem and π
AA = −sτθ″Y < 0 from Eq. (5b). The determinant of the first leading principal minor of the Hessian matrix is
Similarly, the second-order sufficient condition for the bureaucrat’s optimization at the third stage of the game is
The above second-order conditions for the entrepreneur at the last stage of the game and for the bureaucrat at the third stage of the game, as well as those for other agents at other stages of the game, are de facto prerequisite of the existence of such socioeconomic phenomena. That is, they must be true in real-world cases, as otherwise those socioeconomic phenomena would not exist. Therefore, following the tradition of the literature, exogenous functions are defined to feature regular properties (for example, diminishing marginal returns) to best reflect the problem under study and second-order conditions are implicitly assumed to be satisfied, so that the analyses focus on interior solutions in equilibrium.
B Emissions Tax and Policy Enforcement
From Eq. (5a) one obtains that an increase in s results in an increase in Y′, holding all else fixed, which in turn indicates a decline in L given that Y″ < 0. Therefore,
Similarly, one obtains from Eq. (5a) that
Equation (5b) indicates that an increase in s results in an increase in θ′, ceteris paribus. In turn, it translates into an increased A, given that θ″ > 0. Therefore,
Similarly, one obtains from Eq. (5b) that
C Convexity of Emissions in Tax
Given e′ < 0 and ∂Z/∂τ = αsZ/e′ in Eq. (8′), we immediately obtain that
That is, emission discharges by the firm are decreasing in the emissions tax. Moreover, taking the second order derivative we get
Equation (5a) indicates that an increase in τ leads to a decrease in s, holding all else fixed. Therefore, ∂s/∂τ < 0. In turn, we combine e′ < 0, e″ > 0 and ∂Z/∂τ < 0 to obtain
That is, emission discharges by the firm are convex in the emissions tax.
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