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2016-02-18 | Discussion Paper

Why Do Environmental Taxes Work Better in Developed Countries?

Coria, J., C.I. Villegas Palacio & J.C. Cárdenas. 2011. Why Do Environmental Taxes Work Better in Developed Countries?. Working Paper in Economics, No 521, University of Gothenburg.
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Abstract: We compare of  the  performance  of  emission  taxes  between  Colombia  and  Sweden in an experimental  setting  where  subjects are regulated  through  environmental  taxes  and  had  to decide on emission levels, compliance behavior, and adoption of an environmentally friendly technology.  Our  design  allows  us  to  analyze  the  role of variations  in  the  stringency  of  the policy  enforcement  by  regulatory  agencies  in  two  different  cultural  contexts. In  line  with previous  literature  that  emphasizes  the  role  of  social  norms  and  intrinsic  motivations explaining  compliance  behavior,  we  find  that actual  emissions and  tax  underreporting  are lower than predicted by traditional models that are solely based on self-interested preferences. However,  we find  that  for  an  equivalent  monitoring  stringency,  there  are  no  statistically significant  differences in emission  levels  and  compliance  behavior between Colombian  and Swedish  subjects. This  is  to  say  that  despite  the positive  effect  of  social  norms  enhancing compliance, a more stringent enforcement remains as an important mechanism to induce firms to comply with the regulation.