Regulation of Investments in Infrastructure: The Interplay between Strategic Behaviors and Initial Endowments

Authors


  • Denis Claude, Centre d'Economie de la Sorbonne, Maison des Sciences Economiques, 106–112 Boulevard de l'Hôpital, 75647 Paris Cedex 13, France. Charles Figuières, INRA LAMETA, 2 Place Viala, 34060 Montpellier, France (charles.figuieres@supagro.inra.fr). Mabel Tidball, INRA LAMETA, 2 Place Viala, 34060 Montpellier Cedex 1, France (tidball@supagro.inra.fr).

  •  We are grateful for financial assistance from NSERC Canada. We thank Alain Jean-Marie, Erik Ansik, Ngo Van Long, and Georges Zaccour for helpful comments. Also, we thank participants at the 15th Annual Conference of the EAERE and 7th Meeting on Game Theory and Practice for helpful discussions. Finally, many thanks are due to an Associate Editor of JPET and two anonymous referees for very useful comments and suggestions on a previous version of this work. The usual disclaimer applies.

Abstract

This paper explores the dynamic properties of price-based policies in a model of competition between two jurisdictions. Jurisdictions invest over time in infrastructure to increase the quality of the environment, a global public good. They are identical in all respects but one: initial stocks of infrastructure. This is a dynamic type of heterogeneity that disappears in the long run. Therefore, at the steady state, usual intuitions from static settings apply: identical jurisdictions inefficiently underinvest, calling for public subsidies. In the short run, however, counterintuitive properties are established: (i) the evolution of capital stocks can be nonmonotonic and (ii) one jurisdiction can be temporarily taxed, even though it should increase its investment, whereas the other is subsidized. It is shown how these phenomena are related to initial conditions and the kind of interactions between infrastructure capitals, complementarity or substitutability.

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