Economic Growth and the Environment: Theory and Facts¤

Several recent papers propose competing theoretical explanations for the empirical observation of an inverted U-shape relationship between enviromental degradation and per-capita income. We proprose the following test of the theory: calibrate a theoretical model to an already developed economy using information unrelated to the pollution-income curve. Then simulate the model starting from a less developed initial condition and compare the predicted pollutionincome relationship with that in the data. Our results are mixed. Some support exists for the theory that the inverted U-shape results from a corner solution in which less developed countries do not abate pollution. However, pollution peaks at a level of per capita income that is much lower than that observed in the U.S. data.