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Asymmetric Competition among Nation States. A differential game approach

Author

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  • Yutao Han

    () (CREA, University of Luxembourg)

  • Patrice Pieretti

    () (CREA, University of Luxembourg)

  • Skerdilajda Zanaj

    () (CREA, University of Luxembourg)

  • Benteng Zou

    () (CREA, University of Luxembourg)

Abstract

The aim of this paper is to analyse the impact of foreign investments on a small country's economy in a context of international competition. To that end, we model tax and infrastructure competition within a differential game framework between two unequal sized countries. The model accounts for the widely recognised characteristic that small states are more flexible in the political decision-making than bigger countries. On the other hand, we also acknowledge that small size is associated with limited institutional capacity in the provision of public goods. The model shows that the long run outcome of international competition crucially depends on the degree of capital mobility. We show in particular that flexibility mitigates a small economy's likelihood to collapse without eliminating its possible occurrence. Finally we highlight that the benefcial effect of flexibility of a small state increases with its inefficiency to provide public infrastructures and with the degree of international openness.

Suggested Citation

  • Yutao Han & Patrice Pieretti & Skerdilajda Zanaj & Benteng Zou, 2011. "Asymmetric Competition among Nation States. A differential game approach," CREA Discussion Paper Series 11-19, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:11-19
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "The Dynamics of the Location of Firms – A Revisit of Home-Attachment under Tax Competition," CREA Discussion Paper Series 13-15, Center for Research in Economic Analysis, University of Luxembourg.
    3. 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.
    4. 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.
    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, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-39.
    6. Nora Paulus & Patrice Pieretti & Benteng Zou, 2018. "Tax Competition - An intertemporal perspective," CREA Discussion Paper Series 18-10, Center for Research in Economic Analysis, University of Luxembourg.

    More about this item

    Keywords

    Tax/infrastructure competition; di¤erential games; open-loop/Markovian strategies.;

    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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