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Asymmetric competition among Nation States: a differential game approach

Author

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  • Han, Yutao

    (Center for Mathematical Economics, Bielefeld University)

  • Pieretti, Patrice

    (Center for Mathematical Economics, Bielefeld University)

  • Zanaj, Skerdilajda

    (Center for Mathematical Economics, Bielefeld University)

  • Zou, Benteng

    (Center for Mathematical Economics, Bielefeld University)

Abstract

This paper analyzes the impact of foreign investments on a small country's economy in the context of international competition. To that end, we model tax and infrastructure competition within a differential game framework between two unequally sized countries. The model accounts for the widely recognized characteristic that small states are more flexible in their political decision making than larger countries. However, we also acknowledge that small size is associated with limited institutional capacity in the provision of public goods. The model shows that the long-term outcome of international competition crucially depends on the degree of capital mobility. In particular, we show that flexibility mitigates against - but does not eliminate - the likelihood of collapse in a small economy. Finally, we note that the beneficial effect of flexibility in a small state increases with its inefficiency in providing public infrastructure and with the degree of international openness.

Suggested Citation

  • Han, Yutao & Pieretti, Patrice & Zanaj, Skerdilajda & Zou, Benteng, 2014. "Asymmetric competition among Nation States: a differential game approach," Center for Mathematical Economics Working Papers 460, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:460
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    2. Wataru Johdo, 2019. "Deregulation in non-tradable goods sector and relocation of firms in tradable goods sector," Economics Bulletin, AccessEcon, vol. 39(4), pages 2507-2516.
    3. Nelly Exbrayat & Thierry Madiès & Stéphane Riou, 2020. "A Simple Model of Corporate Bailouts in a Globalized Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(4), pages 1575-1605, October.
    4. Yutao Han & Zhen Song, 2022. "On regional integration, fiscal income, and GDP per capita," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(5), pages 506-532, November.
    5. Buiter, Willem H. & Sibert, Anne C., 2016. "Government deficits in large open economies: The problem of too little public debt," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-39.
    6. 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.
    7. Akihiko Yanase & Ngo Van Long, 2020. "Trade Costs and Strategic Investment in Infrastructure in a Dynamic Global Economy with Symmetric Countries," CIRANO Working Papers 2020s-59, CIRANO.
    8. Nora Paulus & Patrice Pieretti & Benteng Zou, 2021. "Is a Dynamic Approach to Tax Games Relevant?," Annals of Economics and Statistics, GENES, issue 144, pages 113-138.
    9. Nora Paulus & Patrice Pieretti & Benteng Zou, 2018. "Tax Competition - An intertemporal perspective," DEM Discussion Paper Series 18-10, Department of Economics at the University of Luxembourg.
    10. Skerdilajda Zanaj & Patrice Pieretti & Benteng Zou, 2021. "On the long run sustainability of small jurisdictions," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(1), pages 15-35, March.
    11. Kato, Hayato, 2015. "The importance of government commitment in attracting firms: A dynamic analysis of tax competition in an agglomeration economy," European Economic Review, Elsevier, vol. 74(C), pages 57-78.
    12. Gustav Feichtinger & Richard F. Hartl & Peter M. Kort & Andrea Seidl & Stefan Wrzaczek, 2022. "Asymmetric Information in a Capital Accumulation Differential Game with Spillover and Learning Effects," Journal of Optimization Theory and Applications, Springer, vol. 194(3), pages 878-895, September.
    13. Yutao Han & Zhen Song, 2017. "On regional integration, fiscal income, and GDP per capita," CEMA Working Papers 600, China Economics and Management Academy, Central University of Finance and Economics.
    14. Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "The Dynamics of the Location of Firms – A Revisit of Home-Attachment under Tax Competition," DEM Discussion Paper Series 13-15, Department of Economics at the University of Luxembourg.

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    More about this item

    Keywords

    Tax/Infrastructure competition; Open-loop/Markovian strategies; Differential games;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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