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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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Suggested Citation

  • Andreas Wagener, 2013. "Tax Competition, Relative Performance, And Policy Imitation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1251-1264, November.
  • Handle: RePEc:wly:iecrev:v:54:y:2013:i::p:1251-1264
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    File URL: http://hdl.handle.net/10.1111/iere.2013.54.issue-4
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    Cited by:

    1. Kai A. Konrad & Florian Morath, 2016. "Evolutionary determinants of war," Defence and Peace Economics, Taylor & Francis Journals, vol. 27(4), pages 520-534, August.
    2. Konrad, Kai A. & Morath, Florian, 2016. "Bargaining with incomplete information: Evolutionary stability in finite populations," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 118-131.
    3. Andreas Wagener, 2016. "Evolutionary Stability in Fiscal Competition," CESifo Working Paper Series 5791, CESifo Group Munich.
    4. Ania, Ana B. & Wagener, Andreas, 2016. "Decentralized redistribution in a laboratory federation," Journal of Urban Economics, Elsevier, vol. 93(C), pages 49-59.
    5. Philipowski, Robert, 2015. "Comparison of Nash and evolutionary stable equilibrium in asymmetric tax competition," Regional Science and Urban Economics, Elsevier, vol. 51(C), pages 7-13.

    More about this item

    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 - - - State and Local Government: Health, Education, and Welfare
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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