Public Capital Stocks in Dynamic Fiscal Competition

Patrice Pierreti (), Giuseppe Pulina and Benteng Zou
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Patrice Pierreti: DEM, Université du Luxembourg

DEM Discussion Paper Series from Department of Economics at the University 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 accumulation 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 convergence to a symmetric steady state, and moderate acquisition frictions generate “invest–then–stop” equilibria; lowering acquisition costs or accelerating diffusion prevents premature exit from infrastructure competition. 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)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:26-04

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