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Evolutionary Stability in Fiscal Competition

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  • Wagener, Andreas

Abstract

In fiscal interaction, a policy is evolutionarily stable if, once adopted by all governments, jurisdictions that deviate from it fare worse than those that stick to it. Evolutionary stability is the appropriate solution concept for models of imitative learning (policy mimicking). We show that evolutionarily stable strategies implement identical allocations, regardless of whether jurisdictions use tax rates or expenditure levels as their strategy variable. This is in contrast to the observation that the allocations in the Nash equilibria of games played in tax rates or expenditure levels differ from one another. With evolutionary play, jurisdictions set taxes and expenditures competitively, i.e., they behave as if they were all negligibly small.

Suggested Citation

  • Wagener, Andreas, 2016. "Evolutionary Stability in Fiscal Competition," Annual Conference 2016 (Augsburg): Demographic Change 145579, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145579
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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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