On the long run economic performance of small economies

Patrice Pieretti, Skerdilajda Zanaj and Benteng Zou
Authors registered in the RePEc Author Service: Theoharry Grammatikos

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: In this paper, we analyze the long run economic performance of a small economy open to foreign investments. Policy instruments used to attract investments are taxes and attractive public infrastructures, whereas the policy choices of the rest of the world are taken as given. Applying the Pontryagin’s maximum principle, we first show that there exists one long run optimal size of the small economy which is saddle-point stable. The transitional path is two-dimensional, if the small economy is patient enough. Then, we show that the share of tax income allocated to the infrastructure expenditures plays an important role in attaining such a steady state. However, a deviation from this policy path can lead to an eventual economic collapse.

Keywords: economic dynamics; spatial dynamic competition; public goods; competition; foreign direct investments (search for similar items in EconPapers)
JEL-codes: F13 F15 H25 H73 O30 O43 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:12-14

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