TAX COMPETITION, RELATIVE PERFORMANCE, AND POLICY IMITATION

Authors

  • ANDREAS WAGENER

    1. University of Hannover, Germany
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    • I am grateful to the editor, Professor Hanming Fang, and two anonymous referees for their helpful and constructive suggestions that improved the article considerably. I am indebted to Ana B. Ania and participants of various seminars and conferences for their comments and stimulating discussion. Please address correspondence to: Andreas Wagener, School of Economics and Management, University of Hannover, Koenigsworther Platz 1, 30167 Hannover, Germany. Phone: +49-511-762-5874. Fax: +49-511-762-4574. E-mail: wagener@sopo.uni-hannover.de.


Abstract

Rather than about their 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. I study such behavior in a standard tax competition game. Both with relative payoff concerns and for imitative policies, evolutionary stability for games with finitely many players is the appropriate solution concept. Independently of the number of jurisdictions involved, an evolutionarily stable tax policy coincides with the competitive outcome of a tax competition game with infinitely many players. It, thus, involves drastic efficiency losses.

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