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On the long run economic performance of small economies

Author Info

Listed author(s):
  • 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.

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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
Handle: RePEc:luc:wpaper:12-14
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Keywords: economic dynamics; spatial dynamic competition; public goods; competition; foreign direct investments;

Find related papers by 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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  1. 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.
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  3. 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.
  4. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
  5. 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.
  6. 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.
  7. Cardarelli, Roberto & Taugourdeau, Emmanuelle & Vidal, Jean-Pierre, 2002. " A Repeated Interactions Model of Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(1), pages 19-38.
  8. Cuong Van & Raouf Boucekkine & Cagri Saglam, 2007. "Optimal Control in Infinite Horizon Problems: A Sobolev Space Approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(3), pages 497-509, September.
  9. 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.
  10. Catenaro, Marco & Vidal, Jean-Pierre, 2003. "Implicit tax co-ordination under repeated policy interactions," Working Paper Series 0259, European Central Bank.
  11. 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.
  12. 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).
  13. 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.
  14. Armstrong, H. & De Kervenoael, R. J. & Li, X. & Read, R., 1998. "A comparison of the economic performance of different micro-states, and between micro-states and larger countries," World Development, Elsevier, vol. 26(4), pages 639-656, April.
  15. Oded Galor, 2005. "Discrete Dynamical Systems," GE, Growth, Math methods 0504001, EconWPA.
  16. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, November.
  17. 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.
  18. Briguglio, Lino, 1995. "Small island developing states and their economic vulnerabilities," World Development, Elsevier, vol. 23(9), pages 1615-1632, September.
  19. 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.
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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.

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