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From Taxes to Politics, from Politics to Taxes: Evidence of Yardstick Competition in the Italian Municipalities

Author

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  • Ilaria Petrarca

    (IMT Lucca, Lucca Italy)

  • Fabio Padovano

    (University of Rennes I, CREM-CNRS, Condorcet Center)

Abstract

Strategic interaction in local tax setting is motivated with yardstick competition only when the fiscal decision influences the incumbents’ probability of being re-elected. Most of the previous analyses draw conclusions on yardstick competition without estimating this link or failing to find any empirical support for it. This paper, on the contrary, conducts a comprehensive test of yardstick competition on Italian Municipalities during the period 1995-2004. First, a vote popularity function is estimated. The empirical findings verify the economic voting behavior and are robust to alternative empirical specifications of the dependent variable. Then, a spatial tax setting equation is estimated. The results show a pattern of mimicking driven by a positive spatial lag coefficient and a negative spatial error coefficient. Finally, the estimated spatial correlation coefficients in time are used to investigate the dynamics of strategic interaction. The results depict a quasi monotonic pattern of convergence of the coefficients towards the lowest levels of spatial interaction, suggesting that a progressive reduction of the mimicking behavior of the incumbents has taken place.

Suggested Citation

  • Ilaria Petrarca & Fabio Padovano, 2011. "From Taxes to Politics, from Politics to Taxes: Evidence of Yardstick Competition in the Italian Municipalities," Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS 2011-01-ccr, Condorcet Center for political Economy.
    • Handle: RePEc:tut:cccrwp:2011-01-ccr
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    References listed on IDEAS

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    Cited by:

    1. Padovano, Fabio & Petrarca, Ilaria, 2014. "Are the responsibility and yardstick competition hypotheses mutually consistent?," European Journal of Political Economy, Elsevier, vol. 34(C), pages 459-477.
    2. Barbara Ermini & Fabio Fiorillo & Raffaela Santolini, 2013. "Environmental protection, land-use regulation and local government taxation: theory and evidence on Italian municipalities," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2013(2), pages 93-112.
    3. Fabio Padovano, 2013. "Are we witnessing a paradigm shift in the analysis of political competition?," Public Choice, Springer, vol. 156(3), pages 631-651, September.

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    More about this item

    Keywords

    Yardstick competition; vote popularity function; spatial panel regression;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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