SPATIAL COMPETITION, CONFLICT AND COOPERATION DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Robert D. Dietz, M.A. * * * * * The Ohio State University 2003 Dissertation Committee: Approved by Professor Donald Haurin, Advisor Professor Gene Mumy ________________________ Advisor Professor Bruce Weinberg Economics Graduate Program Copyright by Robert D. Dietz 2003 ABSTRACT This dissertation contributes to the study of the economics of strategic interactions through the examination of four distinct but thematically related investigations of spatial competition, conflict and cooperation. A spatial accounting, whether conceptualized as local interactions, neighborhood effects, externalities, or other locally defined phenomena, increases the detail used to examine the decisions of economic agents. The first essay examines the theoretical conditions in which spheres of influence form in games of spatial conflict. The term sphere of influence is defined for nation-state competition. Spheres of influence form in non-cooperative games of strategic complements if the contact between the rivals is repeated in both spatial and temporal contexts. The constraints on global cooperation are eased by the ability to form spheres, which allow the nation-states to avoid exhaustive conflict within individual spatial competitions. Employing this sphere of influence model, the second essay develops a theory of cooperative tax strategies to reexamine the problem of local tax competition. Cooperative tax polices assume the form of either uniform or differentiated taxation on local capital. Contrary to previous findings, differentiated taxation of capital may generate higher community welfare, as well as increased resistance to defection from cooperative policy regimes. A spatial econometric examination of state-level local taxation is consistent with these theoretical propositions. The third essay examines another form of spatial competition: defense spending by nation-states. Two theoretical models are developed in this paper: a two-period dyadic rivalry model and an alliance and hegemonic defense provision model. Spatial econometric testing of the model indicates evidence for U.S. hegemonic behavior, but an underlying rivalry in defense expenditure and armed forces for all other nation-states. ii The final essay also employs the sphere of influence model to study the lack of competitive elections for the U.S. Congress. So-called sweetheart gerrymandering is demonstrated to be the result of bipartisan efforts to allocate voters by political preferences in order to reduce electoral competition within congressional districts. The adoption of these strategies increases the number of party loyalists, reduces bipartisan legislative coalitions, increases the risk associated with the legislative process, but does not change the expected legislative output of Congress. iii ACKNOWLEDGMENTS My graduate school experience benefited strongly from the professional and personal ties formed with many people at Ohio State University. I wish to thank my dissertation committee for years of guidance, assistance and mentoring. Besides being excellent economists, all possess personal qualities that I would like to emulate: intellectual curiosity, decency, patience and civility. First and most importantly, I would like to thank my advisor, Don Haurin. Don is a superior researcher, teacher, administrator and advisor. His innumerable hours of coaching improved my writing, research and professional skills. I am indebted to his support throughout graduate school. He provided project topics, financial support, and constructive criticism that improved, if not defined, my training as an economist. I would like to thank Gene Mumy, who is among the best teachers I have witnessed, as both a student and a teaching assistant. Moreover, Gene’s reading and knowledge of economics, philosophy and history benefited me both personally and professionally. Also, I would like to thank Bruce Weinberg, who is a superb economist and whose econometric knowledge and conceptual intuition regarding economics helped me throughout graduate school. Bruce also possesses an ability that at times is in high demand among graduate students: professional encouragement. I also benefited from the help and guidance of other individuals at Ohio State. Within the Economics Department, I would like to thank Lung Fei-Lee, Ben Baack and Jim Peck. Additionally, I would like to thank Chris Browning of Sociology, Morton O’Kelly and Ed Malecki of Geography, Rob Greenbaum of Public Policy, Hazel Morrow-Jones of City and Regional Planning, and Brian Pollins and Randall Schweller of Political Science. In addition, my experience at the Center for Urban and Regional Analysis, through which I met many of these individuals, improved my training as an economist and a social scientist. In this capacity, I also benefited from many hours of conversations with fellow graduate students, including Mark Horner iv of Geography and Katrin Anacker of City and Regional Planning. The interdisciplinary character of this dissertation and my other research is in part due to the efforts of these colleagues. I also would like to thank Thomas Dowling of the Mathematics Department and Craig Davis of the School of Natural Resources, who served on my candidacy and oral defense committees respectively. My preparation for graduate school was my undergraduate experience at George Washington University in Washington, D.C. I would like to thank Tony Yezer and Arun Malik in particular among the excellent economists at George Washington. I would also like to thank the following individuals and their staffs: Congressman Dave Hobson, Congressman Robert Ney and Arthur Kennickle of the Federal Reserve Board of Governors. My experience as an intern for each of these individuals contributed to my professional development. I would also like to thank the following fellow graduate students who became great friends in the preceding years: Roisin O’Sullivan, Maria Pagura, Peter Kauer, Rick Percy, Nisha Arokosar and Sougata Kerr. Each is an outstanding economist and friend. I would like to thank my family for their love, support and encouragement. My mom and dad and my brother and his wife have had to endure many hours of speculating, complaining, and worrying about this process. I am forever grateful for their support. Each has been there when I needed them. My parents gave me a love of learning, a gift that I cannot fully repay. My brother has demonstrated to me what the possibilities are for that gift, an example I seek to follow. Finally, I would like to thank Alka. I could not have completed graduate school without her love and support. Her family, including her parents, her sisters Anji, Anita and Ann, her brother-in-law Rodd, and her nieces Caty and Mira, were an unexpected but important source of support. Alka is a great economist in the true sense of the word. She views economics as a guiding philosophy, and this is reflected in her skill as a teacher. She greatly improved this dissertation and my development as an economist through long hours of discussion and debate. More importantly, she has made me a happier person through her love and companionship. I dedicate this dissertation to her. Ubi concordia, ibi victoria. v VITA November 20, 1974…………..……………Born – Dayton, Ohio 1997…………………………….……………B.S. Economics, The George Washington University 1999…………………………………….……M.A. Economics, The Ohio State University 1998-present………………………………..Graduate Research and Teaching Associate, The Ohio State University PUBLICATIONS 1. Haurin, Donald R., Robert D. Dietz and Bruce A. Weinberg. 2002. “The Impact of Neighborhood Homeownership Rates: A Review of the Theoretical and Empirical Literature,” Journal of Housing Research 13(2): 119-151. 2. Dietz, Robert D. 2002. “The Estimation of Neighborhood Effects in the Social Sciences: An Interdisciplinary Approach,” Social Science Research 31(4): 539-575. FIELDS OF STUDY Major Field: Economics vi TABLE OF CONTENTS Page Abstract…………………………………………………………………………………………………….ii Acknowledgments……………………………………………………………………………………….. iv Vita………………………………………………………………………………………………….…….. vi List of Tables……………………………………………………………………………………………... ix List of Figures……………………………………………………………………………………………. xi Chapters: 1. Introduction…………………………………………………………………………………………….. 1 2. Cooperation amidst Conflict: Sphere of Influence Formation in an Iterated Spatial Game…… 5 2.1 Introduction…………………………………………………………………………………. 5 2.2 Spheres of Influence………………………………………………………………………. 9 2.4 Theoretical Conjectures …..……………………………………………………………... 12 2.4 The Model…………………………………………………………………………………. 15 2.5 Conclusion…………………………………………………………………………………. 34 2.6 Proofs……………………………………………………………………….……………… 37 2.7 Works Cited………………………………………………………………………………... 46 3. A Theory of Cooperative Tax Strategies…………………………………………………………... 48 3.1 Cooperative Tax Strategies……………………………………………………………… 48 3.2 Tax Competition or Tax Cooperation?………………………………………………….. 52 3.3 Tax Competition Research………………………………………………………………. 56 3.3.1 Relevant Research……………………………………………………………. 56 3.3.2 Summary……………………………………………………………………….. 64 3.3.3 Repeated Games……………………………………………………………… 65 3.4 A Model of Cooperative Tax Strategies………………………………………………… 67 3.4.1 The Model……………………………………………………………………… 69 3.4.2 Constant Returns to Scale………………………………………………….... 71 3.4.3 CRS Model with Asymmetric Productivity………………………………….. 75 3.4.4 CRS Model