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Public Capital Stocks in Dynamic Fiscal Competition

Author

Listed:
  • Patrice Pierreti

    (DEM, Université du Luxembourg)

  • Giuseppe Pulina

    (Banque centrale du Luxembourg)

  • Benteng Zou

    (DEM, Université du Luxembourg)

Abstract

"We study dynamic fiscal competition when mobile capital responds to the stock of public infrastructure, not contemporaneous expenditure flows. Two governments choose taxes and public investment in a differential game with gradual accumulation and investment frictions. In the unique Nash equilibrium, long-run dynamics depend on discounting, erosion of advantages, the share of public investment that effectively adds to infrastructure, the private productivity effects of infrastructure, and adjustment/acquisition costs on public investment. The model delivers convergence to a symmetric steady state, and moderate acquisition frictions generate “invest–then–stop” equilibria; lowering acquisition costs or accelerating diffusion prevents premature exit from infrastructure competition. Large initial gaps can rationally delay the laggard’s investment, generating distinct transition paths and persistent asymmetries."

Suggested Citation

  • Patrice Pierreti & Giuseppe Pulina & Benteng Zou, 2026. "Public Capital Stocks in Dynamic Fiscal Competition," DEM Discussion Paper Series 26-04, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:26-04
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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