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Is a dynamic approach of tax games relevant?

Author

Listed:
  • Nora Paulus

    (CREA, Université du Luxembourg)

  • Patrice Pierreti

    (CREA, Université du Luxembourg)

  • Benteng Zou

    (CREA, Université du Luxembourg)

Abstract

In this paper we argue that static models provide an incomplete analysis of interjurisdictional tax competition. According to Wilson (1987) a static tax competition model might predict the long-run outcomes of government decision making in a dynamic setting. We show that this conjecture is only true when policymakers commit to a tax path at the start of the game without future updates (open-loop behavior), with the proviso that they are time-indifferent and/or capital is perfectly mobile. Static models however never predict future outcomes when policymarkers continuously update their tax rates (Markovian behavior). In particular, we address the following aspects. How do long-run outcomes in a dynamic setting change relative to static games? How does social welfare change accordingly? If policymakers have the choice, which strategical behavior (Markovian or open-loop) should they adopt? In light of this, which one confers the highest social advantage?

Suggested Citation

  • Nora Paulus & Patrice Pierreti & Benteng Zou, 2019. "Is a dynamic approach of tax games relevant?," DEM Discussion Paper Series 19-09, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:19-09
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    File URL: https://hdl.handle.net/10993/52956
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic Tax Competition; Differential Games; Markovian Nash Equilibrium; Open-loop Strategy;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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