Pollution, Growth and Social Inefficiency in a Bargaining Model with Cooperative Settlement

This paper establishes a growth model where firms and residents in potentially polluted areas bargain cooperatively to settle environmental concerns. While economic development affects the extent of the negotiation outcomes, the bargaining results also influence firms' incentive to undertake R&D and thus economic growth. Contrasting to growth-promoting policies, policies that create barriers to firm entry or matching may reduce pollution without hindering growth. The opposing effects of production and matching technologies can result in an inverted-U relationship between pollution and growth across countries of various development stages. The opposing effects of thick-matching versus effective discounting and pollution-externality cause the decentralized outcome to involve over or under-pollution