Dynamics of policy adoption with state dependence

David Agrawal and Gregory A. Trandel

Regional Science and Urban Economics, 2019, vol. 79, issue C

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: H7 K2 L5 R3 R5 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Dynamics of Policy Adoption with State Dependence (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:79:y:2019:i:c:s0166046218301777

DOI: 10.1016/j.regsciurbeco.2019.103471

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