Competition over Standards and Taxes

Abstract

We show that, in competition between a developed country and a developing country over standards and taxes, the developing country may have a 'second mover advantage.' A key feature of standards is that, unlike public goods as usually defined, all firms do not unanimously prefer higher standard levels. We introduce this feature to an otherwise familiar model of fiscal competition. Three distinct outcomes can be characterized by varying the cost to firms of 'standard mismatch': (1) the outcome may be efficient; (2) the developing country may be a 'standard haven,' where some firms escape excessively high standards in the developed country; (3) there may be a 'race to the top' with standards set excessively high.