We construct a model of strategic environmental policy with flexible regulation in an international duopoly context. Firms can affect future environmental regulation through a prior investment in abatement. We demonstrate that the strategic use of environmental policy leads to lower welfare and...

When optimal policymaking is subject to dynamic inconsistencies (Kydland and Prescott, 1977), but shocks hit the economy after private agents form expectations, there is a trade off between the need to commit to a policy, and the need to retain discretion so as to respond to shocks. Rogoff...