David E. Wildasin Department of Economics Indiana University

Abstract

Let there be a pair of jurisdictions whose choices of tax, expenditure, or regulatory policies affect each other. Their strategic interactions can be modelled in various ways. Candidate models of duopolitical equilibrium include Nash equilibria in taxes, expenditures, or regulatory standards. Examples of several of these equilibria are presented and compared. Choosing among them is a game-theoretic problem involving the determination of strategic variables subject to side constraints. The problem can be formulated as a two-stage game, in which governments commit to using certain strategic variables in the first stage, and then determine the values of these variables themselves in the second stage.