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Fiscal Competition

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  • David E. Wildasin

    ()
    (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky)

Abstract

The theory of fiscal competition seeks to ascertain how fiscal policymaking is affected by competitive pressures faced by governments. This requires a theory of policy choice, and, as such, the theory of fiscal competition lies squarely in the realm of political economy. This essay presents a concise overview of some of the principal themes that have figured prominently in economic analyses of fiscal competition and identifies significant gaps that warrant further attention and that may occupy the attention of investigators in the years to come. It first sketches a model that has been used frequently in theoretical and empirical analyses of fiscal competition, emphasizing how fiscal policies affect the welfare (real incomes) of various groups and how these impacts depend on the mobility of resources. Subsequent sections address parts of the subject that are less well-settled, highlighting, for example, the fact that exit (or entry) options for mobile resources alters the payoffs from alternative fiscal policies among those who participate actively in the political process and, thus, participation incentives. Two intertemporal aspects of fiscal competition are emphasized: the determination of the "degree" of factor mobility, especially for the purposes of empirical analysis, and the issue of time-varying policies, commitment, and dynamic consistency. The paper also discusses the role of institutions, and particularly of higher- and lower-level governments (i.e., the vertical and horizontal structure of government), in fiscal competition.

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Bibliographic Info

Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2005-05.

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Length: 20 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:ifr:wpaper:2005-05

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Keywords: Fiscal Competition; Political Economy;

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References

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  1. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, 04.
  2. David Wildasin, 2001. "Fiscal Competition in Space and Time," Public Economics 0112004, EconWPA.
  3. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers 630, Stockholm - International Economic Studies.
  4. KEEN, Michael & MARCHAND, Maurice, 1996. "Fiscal Competition and the Pattern of Public Spending," CORE Discussion Papers 1996001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Brennan,Geoffrey & Buchanan,James M., 1980. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521233293, October.
  6. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  7. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  9. Kehoe, Patrick J, 1989. "Policy Cooperation among Benevolent Governments May Be Undesirable," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 289-96, April.
  10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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