Dynamics of Policy Adoption with State Dependence

David Agrawal and Gregory A. Trandel

No 7867, CESifo Working Paper Series from CESifo

Abstract: We study the dynamics of policy diffusion when a first-moving jurisdiction that legalizes an activity reduces the probability of legalization in nearby later-acting jurisdictions. If a jurisdiction’s firms can sell to neighboring residents, but if the good is competitively sold at every location, then policies converge: all jurisdictions legalize or all jurisdictions ban. If firms have some market power, and if the location of firms depends on the order of legalization, an early-adopting government may legalize, but an otherwise identical, but later-acting, neighboring government might not. This possible asymmetry is due to state dependence resulting from the initial distribution of firms following the first-mover’s legalization. Empirically, counties that legalize the sale of fireworks first have more firework vendors just inside their border than counties that legalize later. Furthermore, counties have a longer duration to legalize fireworks if nearby counties have already adopted. State dependence resulting from a first-mover advantage contributes to the policy divergence of regulatory policies.

Keywords: dynamics; fiscal competition; state dependence; externalities; borders (search for similar items in EconPapers)
JEL-codes: H70 K20 L50 R30 R50 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Dynamics of policy adoption with state dependence (2019)
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