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On the long run economic performance of small economies

  • Patrice Pieretti

    ()

    (CREA, University of Luxembourg)

  • Skerdilajda Zanaj

    ()

    (CREA, University of Luxembourg)

  • Benteng Zou

    ()

    (CREA, University of Luxembourg)

In this paper, we analyze the long run economic performance of a small economy open to foreign investments. Policy instruments used to attract investments are taxes and attractive public infrastructures, whereas the policy choices of the rest of the world are taken as given. Applying the Pontryagin’s maximum principle, we first show that there exists one long run optimal size of the small economy which is saddle-point stable. The transitional path is two-dimensional, if the small economy is patient enough. Then, we show that the share of tax income allocated to the infrastructure expenditures plays an important role in attaining such a steady state. However, a deviation from this policy path can lead to an eventual economic collapse.

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File URL: http://wwwen.uni.lu/content/download/57992/684536/file/2012-14%20-%20On%20the%20long%20run%20economic%20performance%20of%20small%20economies.pdf
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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 12-14.

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Date of creation: 2012
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Handle: RePEc:luc:wpaper:12-14
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  1. Cardarelli, R. & Taugourdeau, E. & Vidal, J.-P., 1999. "A Repeated Interactions Model of Tax Competition," Papiers d'Economie Mathématique et Applications 1999.73, Université Panthéon-Sorbonne (Paris 1).
  2. Robert Read, 2008. "Foreign direct investment in small island developing states," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(4), pages 502-525.
  3. Catenaro, Marco & Vidal, Jean-Pierre, 2003. "Implicit tax co-ordination under repeated policy interactions," Working Paper Series 0259, European Central Bank.
  4. Justman, Moshe & Thisse, Jacques-Francois & van Ypersele, Tanguy, 2005. "Fiscal competition and regional differentiation," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 848-861, November.
  5. Jean, HINDRIKS & Susana, PERALTA & Sholmo, WEBER, 2006. "Competing in taxes and investment under fiscal equalization," Discussion Papers (ECON - Département des Sciences Economiques) 2006062, Université catholique de Louvain, Département des Sciences Economiques.
  6. Cuong Le Van & Raouf Boucekkine & Cagri Saglam, 2005. "Optimal control in infinite horizon problems : a Sobolev space approach," Cahiers de la Maison des Sciences Economiques b05094, Université Panthéon-Sorbonne (Paris 1).
  7. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
  8. Marco CATENARO & Jean-Pierre VIDAL, 2006. "Implicit tax co-ordination under repeated policy interactions," Discussion Papers (REL - Recherches Economiques de Louvain) 2006011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  9. Pieretti, Patrice & Zanaj, Skerdilajda, 2011. "On tax competition, public goods provision and jurisdictions' size," Journal of International Economics, Elsevier, vol. 84(1), pages 124-130, May.
  10. Eicher, Theo S. & Turnovsky, Stephen J., 2001. "Transitional dynamics in a two-sector non-scale growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 85-113, January.
  11. Marco Cotenaro & Jean-Pierre Vidal, 2006. "Implicit tax co-ordination under repeated policy interactions," Recherches économiques de Louvain, De Boeck Université, vol. 72(1), pages 5-18.
  12. Briguglio, Lino, 1995. "Small island developing states and their economic vulnerabilities," World Development, Elsevier, vol. 23(9), pages 1615-1632, September.
  13. Harvey W. Armstrong & Robert Read, 2002. "The phantom of liberty?: economic growth and the vulnerability of small states," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(4), pages 435-458.
  14. Armstrong, Harvey & Read, Robert, 1995. "Western European micro-states and EU autonomous regions: The advantages of size and sovereignty," World Development, Elsevier, vol. 23(7), pages 1229-1245, July.
  15. Ogura, Laudo M., 2006. "A note on tax competition, attachment to home, and underprovision of public goods," Journal of Urban Economics, Elsevier, vol. 59(2), pages 252-258, March.
  16. repec:cup:cbooks:9780521637329 is not listed on IDEAS
  17. H Armstrong, R de Kervenoael, Xiao-Ming Li and R Read, . "A Comparision of the economic performance of different micro-states and between micro-states and larger countries," Working Papers ec9/97, Department of Economics, University of Lancaster.
  18. Itaya, Jun-ichi & Okamura, Makoto & Yamaguchi, Chikara, 2008. "Are regional asymmetries detrimental to tax coordination in a repeated game setting?," Journal of Public Economics, Elsevier, vol. 92(12), pages 2403-2411, December.
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