TAX COMPETITION, RELATIVE PERFORMANCE, AND POLICY IMITATION

Rather than about their absolute payoffs, governments in fiscal competition often seem to care about their performance relative to other governments. Moreover, they often appear to mimic policies observed elsewhere. I study such behavior in a standard tax competition game. Both with relative payoff concerns and for imitative policies, evolutionary stability for games with finitely many players is the appropriate solution concept. Independently of the number of jurisdictions involved, an evolutionarily stable tax policy coincides with the competitive outcome of a tax competition game with infinitely many players. It, thus, involves drastic efficiency losses.