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Short-run stick and long-run carrot policy: the role of initial conditions

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  • Denis Claude
  • Charles Figuières
  • Mabel Tidball

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 under-invest, calling for public subsidies. In the short run, however, counterintuitive properties are established: i) the evolution of capital stocks can be non-monotonic, 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.

Suggested Citation

  • Denis Claude & Charles Figuières & Mabel Tidball, 2008. "Short-run stick and long-run carrot policy: the role of initial conditions," Working Papers 08-04, LAMETA, Universtiy of Montpellier, revised Feb 2008.
    • Handle: RePEc:lam:wpaper:08-04
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    File URL: http://www.lameta.univ-montp1.fr/Documents/DR2008-04.pdf
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