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Public Capital Stocks in Dynamic Fiscal Competition

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Listed:
  • Patrice Pieretti

  • Giuseppe Pulina

  • Benteng Zou

Abstract

We study dynamic fiscal competition when mobile capital responds to the stock of public infrastructure, not contemporaneous expenditure flows. Two governments choose taxes and public investment in a differential game with gradual accumula tion and investment frictions. In the unique Nash equilibrium, long-run dynamics depend on discounting, erosion of advantages, the share of public investment that effectively adds to infrastructure, the private productivity effects of infrastructure, and adjustment/acquisition costs on public investment. The model delivers conver gence to a symmetric steady state, and “invest–then–stop” behavior. Large initial gaps can rationally delay the laggard’s investment, generating distinct transition paths and persistent asymmetries.

Suggested Citation

  • Patrice Pieretti & Giuseppe Pulina & Benteng Zou, 2026. "Public Capital Stocks in Dynamic Fiscal Competition," BCL working papers 204, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp204
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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