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Tax Competition, Relative Performance and Policy Imitation

Andreas Wagener

No 2723, CESifo Working Paper Series from CESifo

Abstract: Rather than about absolute payoffs, governments in fiscal competition often seem to care about their performance relative to other governments. Moreover, they often appear to mimic policies observed elsewhere. We study such behaviour in a tax competition game with mobile capital à la Zodrow-Mieszkowski. Both with relative payoff concerns and for imitative policies, evolutionary stability is the appropriate solution concept. It renders tax competition more aggressive than with best-reply policies (Nash equilibrium). Whatever the number of jurisdictions involved, an evolutionary stable tax policy coincides with the competitive outcome of a tax competition game played among infinitely many governments. Tax competition among boundedly rational governments, thus, involves drastic efficiency losses.

Keywords: fiscal competition; relative performance; tax mimicking; evolutionary stability (search for similar items in EconPapers)
JEL-codes: C73 H75 H77 (search for similar items in EconPapers)
Date: 2009
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