A QUANTAL RESPONSE EQUILIBRIUM MODEL OF JURISDICTIONAL TAX COMPETITION IN FISCAL AND ENVIRONMENTAL POLICIES

Topicality: One of the urgent issues of modern economic science within the context of sustainable development is determining the relationship between fiscal and environmental tax policy instruments for each country. Aim and tasks: The article aims to analyze the effects of jurisdictional competition within the behavioral economics framework. The objectives of the study are: 1) to identify how and to what extent bounded rationality can affect a jurisdiction’s strategic choices in determining tax policy formation, assuming that the jurisdictional government behaves as a welfare enhancer and considers the choices made by its competitors; 2) to assess the degree of rationality (or decision negligence) based on empirical data on fiscal and environmental tax policy in the United States (planned for future research). Materials and methods: The theoretical and methodological foundation of this research is based on the studies addressing interstate and interjurisdictional tax competition and its modelling using game theory. Research results: The study examines tax competition between two jurisdictions, incorporating two general equilibrium (GE) economic models within the QRE framework. A behavioral component is introduced into the strategic interaction of jurisdictions in tax policy formation under competitive pressure. A key finding, consistent across models, is that jurisdictions use capital taxation more actively than emissions taxation. Simulation results indicate a high sensitivity to the available strategic options of decision-makers. Even minor changes or uncertainties in strategy settings can significantly alter probability distribution. Under different jurisdictional preferences, both “race to the top” and “race to the bottom” dynamics are observed in fiscal policy, whereas in environmental policy, only a “race to the bottom” is detected. Conclusion: The study employs relatively simple models as an initial framework to investigate issues previously unexplored in behavioral economics. The findings will serve as a basis for empirical research incorporating additional data on the strategic behavior of jurisdictions in environmental and fiscal policy.