A differential game between government and firms: A non-cooperative approach (Q1825108)

We present a differential game where government and firm interact through investment and tax policy. Within an optimal control framework the firm maximizes the future stream of dividend, while the government optimizes an objective function, which depends on government consumption. Attention is paid to different solution concepts (Nash, Stackelberg and Pareto), information structures (open-loop and feedback) and their economic interpretations. Attention is also paid to the problems of time- inconsistency, credibility and reputation, which can arise by using differential games. One of the conclusions is that credibility of governmental policy may have a great influence on the market value of the firm.