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Dynamics of Policy Adoption with State Dependence

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  • David R. Agrawal
  • Gregory A. Trandel

Abstract

We study the dynamics of policy diffusion when a first-moving jurisdiction that legalizes an activity reduces the probability of legalization in nearby later-acting jurisdictions. If a jurisdiction’s firms can sell to neighboring residents, but if the good is competitively sold at every location, then policies converge: all jurisdictions legalize or all jurisdictions ban. If firms have some market power, and if the location of firms depends on the order of legalization, an early-adopting government may legalize, but an otherwise identical, but later-acting, neighboring government might not. This possible asymmetry is due to state dependence resulting from the initial distribution of firms following the first-mover’s legalization. Empirically, counties that legalize the sale of fireworks first have more firework vendors just inside their border than counties that legalize later. Furthermore, counties have a longer duration to legalize fireworks if nearby counties have already adopted. State dependence resulting from a first-mover advantage contributes to the policy divergence of regulatory policies.

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  • David R. Agrawal & Gregory A. Trandel, 2019. "Dynamics of Policy Adoption with State Dependence," CESifo Working Paper Series 7867, CESifo.
  • Handle: RePEc:ces:ceswps:_7867
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    More about this item

    Keywords

    dynamics; fiscal competition; state dependence; externalities; borders;
    All these keywords.

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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