Dynamic Games In Public Economics

This chapter surveys dynamic game models in public economics. In Section 6.1, we review a number of models of private contributions to a public good. These models mainly consider a stock public good (as distinct from a flow public good) that can be accumulated. An exception is the model of Benchekroun and Long (2008a) where the state variable is not a stock of public good, but is simply an indicator of the stock of mutual trust in a community, which can be built up by agents who play a non-cooperative game. This intangible stock can help agents to increase their contributions to a flow public good, period after period, thus achieving higher welfare than the static Nash equilibrium welfare level. In Section 6.2, we turn to a model of voluntary contributions to a discrete public good: the public good can be built only after the total accumulated contribution equals a certain level. Section 6.3 turns to the design of tax and subsidy rules to induce a far-sighted monopolist (or oligopolists) to achieve the social optimum. This problem may be regarded as a leader–follower game: the regulator is a leader, and the firms are followers. Section 6.4 surveys dynamic models of redistributive taxations among factor owners (with the main focus on the taxing of capital income). Game-theoretic issues relating to intergenerational equity and parental altruism are discussed in Section 6.5. Finally, in Section 6.6 we survey game-theoretic models of fiscal competition and electoral incentives set in a dynamic context.