Dynamics of policy adoption with state dependence

• Published in: Regional science and urban economics 2019-11, Vol.79, p.103471, Article 103471
• Main Authors: Agrawal, David R., Trandel, Gregory A.
• Format: Article
• Language: English
• Subjects: Borders; Commercial law; Companies; Dependence; Divergence; Dynamics; Externalities; Fireworks; Fiscal competition; Government; Jurisdiction; Legalization; Power; State dependence; Vendors
• ISSN: 0166-0462; 1879-2308
• DOI: 10.1016/j.regsciurbeco.2019.103471

We study the dynamics of policy diffusion when a first-moving jurisdiction that legalizes an activity reduces the probability of legalization in nearby later-acting jurisdictions. If a jurisdiction's firms can sell to neighboring residents, but if the good is competitively sold at every location, then policies converge: all jurisdictions legalize or all jurisdictions ban. If firms have some market power, and if the location of firms depends on the order of legalization, an early-adopting government may legalize, but an otherwise identical, but later-acting, neighboring government might not. This possible asymmetry is due to state dependence resulting from the initial distribution of firms following the first-mover's legalization. Empirically, counties that legalize the sale of fireworks first have more firework vendors just inside their border than counties that legalize later. Furthermore, counties have a longer duration to legalize fireworks if nearby counties have already adopted. State dependence resulting from a first-mover advantage contributes to the policy divergence of regulatory policies. •We construct a dynamic model of policy adoption with state dependence.•A first-moving jurisdiction may legalize while a later-moving jurisdiction may ban.•More firms locate on the side of the border that historically legalized first.•Having more neighbors legalize earlier increases the time to adoption. .