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Tax Competition, Relative Performance and Policy Imitation

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  • Andreas Wagener

Abstract

Rather than about absolute payoffs, governments in fiscal competition often seem to care about their performance relative to other governments. Moreover, they often appear to mimic policies observed elsewhere. We study such behaviour in a tax competition game with mobile capital à la Zodrow-Mieszkowski. Both with relative payoff concerns and for imitative policies, evolutionary stability is the appropriate solution concept. It renders tax competition more aggressive than with best-reply policies (Nash equilibrium). Whatever the number of jurisdictions involved, an evolutionary stable tax policy coincides with the competitive outcome of a tax competition game played among infinitely many governments. Tax competition among boundedly rational governments, thus, involves drastic efficiency losses.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2723.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2723

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Keywords: fiscal competition; relative performance; tax mimicking; evolutionary stability;

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Cited by:
  1. Konrad, Kai A. & Morath, Florian, 2013. "Evolutionary determinants of war," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 418, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Ana B. Ania & Andreas Wagener, 2014. "Decentrqalized Redistribution in a Laboratory Federation," Vienna Economics Papers, University of Vienna, Department of Economics 1402, University of Vienna, Department of Economics.

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