Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207258 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7867
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We study the dynamics of policy diffusion when a first-moving jurisdiction that legalizes an activity reduces the probability of legalization in nearby later-acting jurisdictions. If a jurisdiction’s firms can sell to neighboring residents, but if the good is competitively sold at every location, then policies converge: all jurisdictions legalize or all jurisdictions ban. If firms have some market power, and if the location of firms depends on the order of legalization, an early-adopting government may legalize, but an otherwise identical, but later-acting, neighboring government might not. This possible asymmetry is due to state dependence resulting from the initial distribution of firms following the first-mover’s legalization. Empirically, counties that legalize the sale of fireworks first have more firework vendors just inside their border than counties that legalize later. Furthermore, counties have a longer duration to legalize fireworks if nearby counties have already adopted. State dependence resulting from a first-mover advantage contributes to the policy divergence of regulatory policies.
Subjects: 
dynamics
fiscal competition
state dependence
externalities
borders
JEL: 
H70
K20
L50
R30
R50
Document Type: 
Working Paper
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