Modeling International Diffusion: Inferential Benefits and Methodological Challenges, with an Application to International Tax Competition

WZB Markets and Political Economy Working Paper No. SP II 2004-12

57 Pages Posted: 1 Jul 2004

See all articles by Robert J. Franzese

Robert J. Franzese

University of Michigan

Jude C. Hays

University of Pittsburgh

Date Written: June 2004

Abstract

Although scholars recognize that time-series-cross-section data typically correlate across both time and space, they tend to model temporal dependence directly, often by lags of dependent variables, but to address spatial interdependence solely as a nuisance to be "corrected" by FGLS or to which to be "robust" in standard-error estimation (by PCSE). We explore the inferential benefits and methodological challenges of directly modeling international diffusion, one form of spatial dependence. To this end, we first identify two substantive classes of modern comparative-and-international-political-economy (C&IPE) theoretical models - (context-conditional) open-economy comparative political-economy (CPE) models and international political-economy (IPE) models, which imply diffusion (along with predecessors, closed-economy CPE and orthogonal open-economy CPE) - and then we evaluate the relative performance of three estimators - non-spatial OLS, spatial OLS, and spatial 2SLS - for analyzing empirical models corresponding to these two modern alternative theoretical visions from spatially interdependent data. Finally, we offer a substantive application of the spatial 2SLS approach in what we call a spatial error-correction model of international tax competition.

Keywords: International tax competition, panel models, policy diffusion, political economy, spatial interdependence

JEL Classification: C23, H20

Suggested Citation

Franzese, Robert J. and Hays, Jude C., Modeling International Diffusion: Inferential Benefits and Methodological Challenges, with an Application to International Tax Competition (June 2004). WZB Markets and Political Economy Working Paper No. SP II 2004-12, Available at SSRN: https://ssrn.com/abstract=560581 or http://dx.doi.org/10.2139/ssrn.560581

Robert J. Franzese (Contact Author)

University of Michigan ( email )

Ann Arbor, MI 48109
United States
734-936-1850 (Phone)
734-764-3341 (Fax)

HOME PAGE: http://www-personal.umich.edu/~franzese/

Jude C. Hays

University of Pittsburgh ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

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