Regime Switching and the Shape of the

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 induces a decreasing emission-income relationship. At the empirical level we estimate such a regime switching model and we find an inverse-V-shaped emission - income relationship. .Our findings are in line with the original papers in this literature. We estimate thresholds which can be viewed as turning points, and which occur at reasonable values.