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Asymmetric competition among Nation States: a differential game approach

Yutao Han, Patrice Pieretti, Skerdilajda Zanaj () and Benteng Zou ()
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Yutao Han: Center for Mathematical Economics, Bielefeld University

No 460, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: 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.

Keywords: Tax/Infrastructure competition; Open-loop/Markovian strategies; Differential games (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gth and nep-pbe
Date: 2014-04-15
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Related works:
Journal Article: Asymmetric competition among nation states: A differential game approach (2014) Downloads
Working Paper: Asymmetric Competition among Nation States. A differential game approach (2011) Downloads
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