Interdependence in Comparative Politics: Substance, Theory, Empirics, Substance

Abstract

Interdependence is ubiquitous, and often central, across comparative politics. In comparative political economy, for example, globalization and rising capital mobility imply tax competition that suggests the fiscal policies of one country must depend crucially upon those of other countries with which it competes for capital. This paper shows this theoretically and, more generally, how any situation involving externalities from one unit's actions on others' implies interdependence. Positive/negative externalities induce negative/positive interdependence, which spurs competitive-races/free-riding, with corresponding early/late-mover advantages, and so strategic rush-to-act/delay-and-inaction. We show next how to model such interdependent processes empirically, that not doing so risks severe omitted-variable biases that erroneously favor domestic and exogenous-external accounts over interdependence but that doing so naïvely risks simultaneity biases with the opposite substantive implications. Then we discuss how to estimate properly specified interdependence models with spatial lags by maximum likelihood and, finally, how to interpret and present the resulting estimated spatio-temporally dynamic effects, response paths, and long-run steady-states, with their associated standard errors. We illustrate all this by replicating a noteworthy earlier, non-spatial, study of capital-tax competition. Web appendices contain further technical details, literature survey, data, statistical-software code, and spreadsheet templates for conducting all estimation and calculation procedures.

Keywords: Interdependence, Spatial Econometrics, Spatio-Temporal-Lag Model, Globalization, Tax Competition, Diffusion, Galton's Problem

JEL Classification: C5, F42, H87