Chip Taylor

Economic development incentives and the Prisoners' dilemma

The other day I mentioned that communities considering offering location incentives for economic development faced something similar to the prisoner's dilemma.

Well, Paul Caron, whose TaxProf Blog I just recently discovered, links to some more research on incentives.

One of the articles he links to discusses just such a game theoretic model:

Why do states enact incentive programs in spite of their adverse fiscal impact? The answer to this puzzle, as is now well known, is found in the incentive structure that states face when competing with each other for a tax base. Namely, states face an incentive structure akin to the so-called "prisoners dilemma," in which individually rational behavior is nonetheless collectively irrational. Because of this pathological incentive structure, state authorities cannot and will not end incentive policies on their own.

I gather from the rest of the abstract that the author of that article advocates federal intervention to stop incentive policies. I don't know about that, but I do want to track down a copy of the article to read his application of the prisoner's dilemma to the issue.