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Fiscal Competition and the Composition of Public Spending: Theory and Evidence

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Author Info
Rainald Borck
Marco Caliendo
Viktor Steiner

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Abstract

We consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods: one that benefits mobile skilled workers and one that benefits immobile unskilled workers. We derive the jurisdictions' reaction functions for different spending categories. We then estimate these reaction functions using data from German communities. Thereby we explicitly allow for a spatially lagged dependent variable and a possible spatial error dependence by applying a generalized spatial two-stage least-squares (GS2SLS) procedure. The results show that there is significant interaction between spending of neighboring counties in Germany.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 63 (2007)
Issue (Month): 2 (June)
Pages: 264-277
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200706)63:2_264:fcatco_2.0.tx_2-l

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Web page: http://www.mohr.de/fa

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Related research
Keywords: tax competition; capital-skill complementarity; public spending; spatial econometrics;

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Find related papers by JEL classification:
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J61 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Geographic Labor Mobility; Immigrant Workers

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kelejian, Harry H & Prucha, Ingmar R, 1998. "A Generalized Spatial Two-Stage Least Squares Procedure for Estimating a Spatial Autoregressive Model with Autoregressive Disturbances," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 99-121, July. [Downloadable!] (restricted)
  2. Mariassunta Giannetti, 2001. "Skill Complementarities and Migration Decisions," LABOUR, CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd, vol. 15(1), pages 1-31, 03. [Downloadable!] (restricted)
  3. Kelejian, Harry H & Prucha, Ingmar R, 1999. "A Generalized Moments Estimator for the Autoregressive Parameter in a Spatial Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 509-33, May.
  4. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November. [Downloadable!] (restricted)
  5. Buettner, Thiess, 2001. "Local business taxation and competition for capital: the choice of the tax rate," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 215-245, April. [Downloadable!] (restricted)
    Other versions:
  6. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Journal of Public Economics, Elsevier, vol. 71(3), pages 441-458, March. [Downloadable!] (restricted)
  7. Buettner, Thiess, 1999. "Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Jan K. Brueckner, 2000. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  9. Rainald Borck & Marco Caliendo & Viktor Steiner, 2005. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," Discussion Papers of DIW Berlin 528, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  10. Jan K. Brueckner & Luz A. Saavedra, 2000. "Do Local Governments Engage in Strategic Property-Tax Competition?," Econometric Society World Congress 2000 Contributed Papers 0357, Econometric Society. [Downloadable!]
  11. Jennifer Hunt, 2000. "Why Do People Still Live in East Germany?," Discussion Papers of DIW Berlin 201, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  12. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    Other versions:
  13. Brueckner, Jan K., 1998. "Testing for Strategic Interaction Among Local Governments: The Case of Growth Controls," Journal of Urban Economics, Elsevier, vol. 44(3), pages 438-467, November. [Downloadable!] (restricted)
  14. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March. [Downloadable!] (restricted)
    Other versions:
  15. Baicker, Katherine, 2005. "The spillover effects of state spending," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 529-544, February. [Downloadable!] (restricted)
  16. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October. [Downloadable!] (restricted)
  17. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October. [Downloadable!] (restricted)
  18. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer, vol. 12(4), pages 475-492, August. [Downloadable!] (restricted)
  19. Bergstrom, Villy & Panas, Epaminondas E, 1992. "How Robust Is the Capital-Skill Complementarity Hypothesis?," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 540-46, August. [Downloadable!] (restricted)
  20. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shun-ichiro Bessho & Kimiko Terai, 2008. "Competition for Private Capital and Central Grants: The Case of Japanese Industrial Parks," Working Papers 080909, University of California-Irvine, Department of Economics. [Downloadable!]
  2. Rainald Borck & Marco Caliendo & Viktor Steiner, 2006. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," IZA Discussion Papers 2428, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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