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Tax Competition, Relative Performance and Policy Imitation

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Author Info
Andreas Wagener ()

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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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2723.

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

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

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Health, Education, and Welfare
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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  27. Aleksandra Riedl & Silvia Rocha-Akis, 2009. "Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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This page was last updated on 2009-11-3.

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