Fiscal Competition in Space and Time

This paper analyzes fiscal competition among numerous spatiallyseparated jurisdictions in an explicitly dynamic framework. The degree of factor mobility between jurisdictions is imperfect because it is costly and timeconsuming to adjust factor stocks. Even if it is harmful in the long run, a jurisdiction’s residents can benefit in the short run from taxing mobile factors owned by non-residents. The optimal tax on mobile factors is lower, the faster the speed with which factors adjust to fiscal policy. Anticipated taxes are less beneficial than those that can be imposed unexpectedly. Acknowledgments: Earlier versions of some of the analysis and results in this paper were presented at a conference on “Fiscal Competition and Federalism in Europe” at the Zentrum für Europäische Wirtschaftsforschung (Mannheim), at the University of Kentucky, at a meeting of the Economic Policy Panel (Lisbon), and at the ISPE conference on “Public Finance and Redistribution” at CORE. I am grateful to participants for helpful comments but retain responsibility for errors.