Public Capital Stocks in Dynamic Fiscal Competition

Patrice Pieretti (), Giuseppe Pulina and Benteng Zou ()

No 204, BCL working papers from Central Bank of Luxembourg

Abstract: We study dynamic fiscal competition when mobile capital responds to the stock of public infrastructure, not contemporaneous expenditure flows. Two governments choose taxes and public investment in a differential game with gradual accumula tion and investment frictions. In the unique Nash equilibrium, long-run dynamics depend on discounting, erosion of advantages, the share of public investment that effectively adds to infrastructure, the private productivity effects of infrastructure, and adjustment/acquisition costs on public investment. The model delivers conver gence to a symmetric steady state, and “invest–then–stop” behavior. Large initial gaps can rationally delay the laggard’s investment, generating distinct transition paths and persistent asymmetries.

Keywords: Fiscal competition; public capital stock; infrastructure investment; differential games; mobile capital. (search for similar items in EconPapers)
JEL-codes: C73 F21 F23 H25 H54 H73 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2026-02
New Economics Papers: this item is included in nep-dge and nep-gth
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Related works:
Working Paper: Public Capital Stocks in Dynamic Fiscal Competition (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp204

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