Pollution Abatement Investment When Firms Lobby Against Environmental Regulation

In this paper, we study a firm’s optimal lobbying behavior and its effect on investment in pollution abatement capital. We develop a dynamic framework where a representative firm can invest in both abatement and lobby capital in response to a possible future increase in pollution tax. We show that when the firm lobbys against the scale of the tax increase at a determined date, it should act like an occasional lobbyer by investing a lump-sum (optimal) amount in the lobby capital only at that date. But, to delay the new tax, it should act like a habitual lobbyer by investing continously and at increasing rates over an optimal time period. We show that lobby expenditure crowds out investment in abatement capital and that this effect is stronger the more efficient is the lobbying activity.