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On the long run economic performance of small economies

Author

Listed:
  • Patrice Pieretti

    () (CREA, University of Luxembourg)

  • Skerdilajda Zanaj

    () (CREA, University of Luxembourg)

  • Benteng Zou

    () (CREA, University of Luxembourg)

Abstract

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.

Suggested Citation

  • Patrice Pieretti & Skerdilajda Zanaj & Benteng Zou, 2012. "On the long run economic performance of small economies," CREA Discussion Paper Series 12-14, Center for Research in Economic Analysis, University of Luxembourg.
    • Handle: RePEc:luc:wpaper:12-14
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    References listed on IDEAS

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    Cited by:

    1. 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.

    More about this item

    Keywords

    economic dynamics; spatial dynamic competition; public goods; competition; foreign direct investments;

    JEL classification:

    • 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
    • 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
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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