TITLE:
Dynamic Fiscal Competition with Public Infrastructure Investment: Austerity and Attracting Capital Inflow
AUTHORS:
Yang Chen, Weihong Huang, Simon Rudkin
KEYWORDS:
Dynamic Fiscal Competition, Infrastructure Investment
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.11,
August
22,
2018
ABSTRACT: In a global economy characterised by austerity,
regionalisation and bidding for mobile capital, fiscal competition models have
a major contribution to make to the economic development debate. With labour
proving immobile, even within borderless regions like the European Union, our
extension of static models into a dynamic setting offers invaluable advice for
policymakers. This paper presents the effects of fiscal competition,
considering the inter-temporal interactions among the economic activity of
firms, capital taxation and public infrastructure investment in a small-open
economy. Four cases emerge, but most interestingly public and private capital
being substitutes allows reductions in the net tax burden alongside
infrastructure accumulation provided public capital is not too productive. We
also review factor complementarity, where subsidies become attractive. Transitional
impacts depend on the marginal product of public capital. Hence, from the first
case, our model addresses the apparent puzzle of high infrastructure
accompanying low taxation, and does so without imposing limitations on
competition.