Networks as Channels of Policy Diffusion: Explaining Worldwide Changes in Capital Taxation, 1998-2006

This paper studies policy changes in capital taxation by focusing on policy interdependence induced by network dynamics at the international level. The empirical findings indicate that the competition mechanism induced by network position similarity in the network of portfolio investment and that of exports causes policy diffusion in corporate taxation; the socialization mechanism (policy learning and emulation) induced by network position proximity in the IGO networks also drives policy changes, and the evidence is much stronger in the IGO networks that facilitate policy learning than in those that facilitate emulation. The paper also discusses explicitly empirical challenges to incorporate network characteristics into connectivity matrices in spatial lag models often used to study policy diffusion. It suggests that students of policy diffusion should discuss as explicitly as possible the assumptions and procedures to construct connectivity matrices and present results from alternative specifications: our conclusion on the strength of policy diffusion is often sensitive to the choice of connectivity matrices.