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Nash equilibrium in tax and public investment competition

Ajay Sharma and Rupayan Pal ()

International Review of Economics & Finance, 2019, vol. 62, issue C, 106-120

Abstract: We analyze Nash equilibrium in fiscal competition with tax and public investment between symmetric regions. We show that given the opposite strategic nature of tax (strategic complement) and public investment (strategic substitute), there is possibility of multiple equilibria. We find that if strategic substitute effect dominates strategic complement effect, then both regions have first mover advantage in a timing game and simultaneous move Nash equilibrium (early, early) emerges; otherwise sequential move equilibria-(early, late) and (late, early) emerges. Also, sequential move Nash equilibria are Pareto improving than simultaneous move outcome. Lastly, race-to-the-bottom in taxes is restricted in sequential move equilibria.

Keywords: Capital taxation; Public investment; Tax competition; Joint strategic substitutes; Joint strategic complements (search for similar items in EconPapers)
JEL-codes: H25 F21 R50 H41 H73 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:62:y:2019:i:c:p:106-120

DOI: 10.1016/j.iref.2019.03.005

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