Answers to Problem Set Number 4

1. Game structure

a. The players are the Municipality of Anchorage and the Mat-Su Borough. One could also make a case that the potential developers who might locate projects in either jurisdiction are also players, because they can play one government off against the other to bid down taxes for desirable new projects.

b. Possible moves: the story is about whether or not to lower property taxes to entice developers.

c. Payoffs: property tax revenues for the local governments from new businesses.

d. The information structure of this game depends on whether the developers are counted. If you assume that the developers are not playing, then there is perfect information (because government decisions are public), complete information, symmetric, but uncertain, because the governments know what each other is doing but do not know what developers are going to do. If you include the developers in the game, the information stucture changes. There is no longer perfect or symmetric information (developers do not have to reveal what their costs are from locating in either place or even what they have decided to do).

2. Whether there is a dominant strategy depends on what developers are going to do. If developers are not going to change their decisions based on property taxes, then the payoffs are as follows:

Developers ignore property taxes in location decisions

	Mat-Su lowers taxes	Mat-Su holds taxes
Anchorage lowers taxes	lower revenues lower revenues	lower revenues, no change
Anchorage holds taxes	no change, lower revenues	same revenues, same revenues

In this case the dominant strategy is to keep takes the same. If developers are sensitive to taxes, then the payoffs might change to:

Developers sensitive to property taxes in location decisions

	Mat-Su lowers taxes	Mat-Su holds taxes
Anchorage lowers taxes	lower revenues, lower revenues	higher revenues, much lower revenues
Anchorage holds taxes	much lower revenues, higher revenues	same revenues, same revenues

In this case the dominant strategy is to lower taxes.

3 a.  The players are the firm and the three boroughs. 

b. Possible moves:
    firm: threaten to locate to area with lowest taxes, make no statement about taxes.
    boroughs: lower taxes, not lower taxes.
  
c. Payoffs:
    firm: property taxes in borough in which it decides to locate
    boroughs: property taxes from the firm if it locates there

d. See answer to 1d.

e. The dominant strategy for each government is to lower taxes
f. The dominant strategy for the firm is to threaten to move to area with lowest taxes, and start a bidding war. From comparing the answers to part 2, it is obvious why businesses always threaten to relocate if they do not get tax concessions.