Regime switching and the shape of the emission-income relationship

We explore the idea of regime switching as a new methodological approach in the analysis of the emission-income relationship. We formalize the idea by using a simple static model of profit maximization where above a threshold income level a more stringent environmental policy could induce a decreasing emission-income relationship. At the empirical level we estimate such a regime switching model and we estimate an inverse-V-shaped emission-income relationship for ambient concentrations of SO2 and smoke. We estimate thresholds which can be viewed as turning points, and which occur at reasonable values.