Part 1 - AL-Tax

Chapter 3in the section after next, but first we explain the serious econometric challengesto estimating and, a fortiori, distinguishing these alternatives and some (partiallysuccessful) approaches to surmounting these challenges.3.4 Econometric issues in estimating C&IPE empiricalmodels from spatially interdependent dataOpen-economy CPE explicitly recognizes the potentially large effects of externalconditions on domestic political and economic outcomes, often emphasizinghow domestic institutions, structure, and contexts shape the degree and nature ofdomestic exposure to such external (i.e. foreign or international) conditionsand/or moderate the domestic policy and outcome responses thereto. This producescharacteristic theoretical and empirical models of the following sort:y it ξ it β η t β ξ it ⋅ηt β3εit0 1 ( ) .(3.6)In equation (3.6), the incidence, impact, and/or effects of global conditions, η t , ondomestic policies/outcomes, y it , are conditioned by domestic institutional–structural–contextual factors, ξ it , and so differ across spatial units (countries).Welfare/tax-state retrenchment examples of such an approach include the aforementionedIversen–Cusack or Cameron–Rodrik arguments. The exogenousexternalconditions, η t , in those cases might reflect technological or other progressin production, shipping, or financial processes. 6 The domestic institutional,structural, or contextual conditions, ξ it , in these examples that affect policies/outcomes and/or moderate domestic policy/outcome responses to these exogenousexternaltrends might include union density, existing industrial structure, andpartisan electoral competitiveness. In empirical specifications of such OE-CPEmodels, researchers would typically leave to FGLS or PCSE ‘corrections’ any spatialcorrelation distinct from that induced by the common or correlated responsesto the exogenous-external conditions.II-PE approaches and models, contrarily, explicitly incorporate the interdependenceof domestic and foreign policies/outcomes, as implied, for example, bytax competition. C&IPE combines the two to produce characteristic theoreticaland empirical models of the following sort:y∑ρ w y , ξβ0 ηβ1 ( ξ⋅η ) β3ε,it ij j t it t it t itj≠i(3.7)53