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Asymmetric Competition among Nation States: A Differential Game Approach
Han, Yutao; Pieretti, Patrice; Zanaj, Skerdilajda et al.
2012
 

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Keywords :
Tax/Infrastructure competition; Open-loop/Markovian strategies; Differential games
Abstract :
[en] This paper analyzes the impact of foreign investments on a small country's economy in the context of international competition. To that end, we model tax and infrastructure competition within a differential game framework between two unequally sized countries. The model accounts for the widely recognized characteristic that small states are more flexible in their political decision making than larger countries. However, we also acknowledge that small size is associated with limited institutional capacity in the provision of public goods. The model shows that the long-term outcome of international competition crucially depends on the degree of capital mobility. In particular, we show that flexibility mitigates against - but does not eliminate - the likelihood of collapse in a small economy. Finally, we note that the beneficial effect of flexibility in a small state increases with its inefficiency in providing public infrastructure and with the degree of international openness.
Disciplines :
International economics
Author, co-author :
Han, Yutao ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Pieretti, Patrice ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Zanaj, Skerdilajda  ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Zou, Benteng  ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
Language :
English
Title :
Asymmetric Competition among Nation States: A Differential Game Approach
Publication date :
2012
Publisher :
Bielefeld University, Center for Mathematical Economics
Commentary :
Working Papers
Available on ORBilu :
since 25 June 2013

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