On the long run sustainability of small jurisdictions

In this paper, we analyse the long run sustainability of a small jurisdiction open to capital flows. Policy instruments used to reach an efficient steady state (when possible) are capital taxes and attractive public infrastructures. We first show that there exists one long run efficient equilibrium which is saddle-point stable. If capital mobility is high enough, the small economy is always able to converge to a long run efficient state by a one-shot adjustment of the share of taxes allocated to infrastructure. If capital mobility is too low, convergence to long run efficiency may be impossible. In this case, an eventual economic collapse can occur.