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Asymmetric Competition among Nation States. A differential game approach

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  • Yutao Han

    ()
    (CREA, University of Luxembourg)

  • Patrice Pieretti

    ()
    (CREA, University of Luxembourg)

  • Skerdilajda Zanaj

    ()
    (CREA, University of Luxembourg)

  • Benteng Zou

    ()
    (CREA, University of Luxembourg)

Abstract

The aim of this paper is to analyse the impact of foreign investments on a small country's economy in a context of international competition. To that end, we model tax and infrastructure competition within a differential game framework between two unequal sized countries. The model accounts for the widely recognised characteristic that small states are more flexible in the political decision-making than bigger countries. On the other hand, we also acknowledge that small size is associated with limited institutional capacity in the provision of public goods. The model shows that the long run outcome of international competition crucially depends on the degree of capital mobility. We show in particular that flexibility mitigates a small economy's likelihood to collapse without eliminating its possible occurrence. Finally we highlight that the benefcial effect of flexibility of a small state increases with its inefficiency to provide public infrastructures and with the degree of international openness.

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File URL: http://wwwfr.uni.lu/content/download/45047/514890/file/2011-19%20-%20Asymmetric%20competition%20among%20Nation%20States.%20A%20differential%20game%20approach.pdf
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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-19.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-19

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Keywords: Tax/infrastructure competition; di¤erential games; open-loop/Markovian strategies.;

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References

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  2. Ben Zissimos & Myrna Wooders, 2003. "Public Good Differentiation and the Intensity of Tax Competition," Vanderbilt University Department of Economics Working Papers 0710, Vanderbilt University Department of Economics.
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  16. Mansoorian, Arman & Myers, Gordon M., 1993. "Attachment to home and efficient purchases of population in a fiscal externality economy," Journal of Public Economics, Elsevier, vol. 52(1), pages 117-132, August.
  17. R. Cellini & L. Lambertini, 2000. "Feedback and Open-Loop Solutions," Working Papers 393, Dipartimento Scienze Economiche, Universita' di Bologna.
  18. Lawrence Kenny & Stanley Winer, 2006. "Tax Systems in the World: An Empirical Investigation into the Importance of Tax Bases, Administration Costs, Scale and Political Regime," International Tax and Public Finance, Springer, vol. 13(2), pages 181-215, May.
  19. Patrice Pieretti & Skerdilajda Zanaj, 2009. "On tax competition, public goods provision and jurisdictions' size," CREA Discussion Paper Series 09-14, Center for Research in Economic Analysis, University of Luxembourg.
  20. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, April.
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  22. Easterly, William & Kraay, Aart, 2000. "Small States, Small Problems? Income, Growth, and Volatility in Small States," World Development, Elsevier, vol. 28(11), pages 2013-2027, November.
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Citations

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Cited by:
  1. Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "The Dynamics of the Location of Firms – A Revisit of Home-Attachment under Tax Competition," CREA Discussion Paper Series 13-15, Center for Research in Economic Analysis, University of Luxembourg.
  2. Han, Yutao & Pieretti, Patrice & Zou, Benteng, 2013. "An extension of the home-attachment criteria under dynamic tax competition," Economics Letters, Elsevier, vol. 121(3), pages 508-510.

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