Institutional Reforms and Interaction of Local Governments: A Dynamic Approach

Institutional Reforms and Interaction of Local Governments: A Dynamic Approach

Georges Sarafopoulos (Department of Economics, Democritus University, Komotini, Greece) and Panagiotis G. Ioannidis (Department of Economics, Democritus University, Komotini, Greece)
DOI: 10.4018/IJPMAT.2015070103
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The paper considers the interaction between regions during the implementation of a reform, on regional development through a discrete dynamical system based on replicator dynamics. The existence and stability of equilibria of this system are studied. The authors show that the parameter of the local prosperity may change the stability of equilibrium and cause a structure to behave chaotically. For the low values of this parameter the game has a stable Nash equilibrium. Increasing these values, the Nash equilibrium becomes unstable, through period-doubling bifurcation. The complex dynamics, bifurcations and chaos are displayed by computing numerically Lyapunov numbers, sensitive dependence on initial conditions and the box dimension.
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2. Literature Review

Regional development can be studied throughout elements of Game theory in order to isolate and to compare strategies of different actors that operate in a common framework. Dynamic formation of equilibrium in terms of cooperation or conflict is easily understood by extensive and normative form games (Gibbons, 1992). In a regional context, Game theory’s contribution stands in the research about the determinants of local development by focusing on the role of local actors. (Hazakis & Ioannidis, 2012).

Local government is the main pillar of local planning, especially when its institutional competences enable interventions in fields of local entrepreneurship, social capital and intergovernmental cooperation (Ioannidis, 2013). Institutional reforms of local government redeploy economic space by amalgamating municipalities and by transferring powers from central governments to decentralized units (Woolman, 2004). Strengthening the responsibilities of local governments improves the dynamic constitution of local milieu as more opportunities arise for participation in the commons. Taking into account that intraregional flows of capital, goods and labor force influence significantly regional welfare, it can be stated that the operation of neighboring local governments during the implementation of institutional reforms is a crucial intangible asset of regional development.

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