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

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  • Borck, Rainald

    ()
    (DIW Berlin)

  • Caliendo, Marco

    ()
    (University of Potsdam)

  • Steiner, Viktor

    ()
    (Free University of Berlin)

Abstract

In this paper, we consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods, one which benefits mobile skilled workers and one which 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 neighbouring counties in Germany.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2428.

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Length: 18 pages
Date of creation: Nov 2006
Date of revision:
Publication status: published in: FinanzArchiv, 2007, 63 (2), 264-277
Handle: RePEc:iza:izadps:dp2428

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

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References

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  1. Jennifer Hunt, 2000. "Why Do People Still Live in East Germany?," Discussion Papers of DIW Berlin 201, DIW Berlin, German Institute for Economic Research.
  2. Rainald Borck & Marco Caliendo & Viktor Steiner, 2007. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 63(2), pages 264-277, June.
  3. 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.
  4. Paolo Mauro & Antonio Spilimbergo, 1998. "How Do the Skilled and the Unskilled Respond to Regional Shocks? the Case of Spain," IMF Working Papers 98/77, International Monetary Fund.
  5. Thiess Buettner, 2001. "Local Business Taxation and Competition for Capital: The Choice of the Tax Rate," CESifo Working Paper Series 440, CESifo Group Munich.
  6. Thiess Büttner, 1999. "Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 363-, July.
  7. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.
  9. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 509-33, May.
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  11. 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, Springer, vol. 17(1), pages 99-121, July.
  12. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Munich Reprints in Economics, University of Munich, Department of Economics 19402, University of Munich, Department of Economics.
  13. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, Elsevier, vol. 35(2), pages 229-240, March.
  14. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer, Springer, vol. 12(4), pages 475-492, August.
  15. 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.
  16. Baicker, Katherine, 2005. "The spillover effects of state spending," Journal of Public Economics, Elsevier, Elsevier, vol. 89(2-3), pages 529-544, February.
  17. Brueckner, Jan K. & Saavedra, Luz A., 2001. "Do Local Governments Engage in Strategic Property-Tax Competition?," National Tax Journal, National Tax Association, vol. 54(n. 2), pages 203-30, June.
  18. Mariassunta Giannetti, 2001. "Skill Complementarities and Migration Decisions," LABOUR, CEIS, CEIS, vol. 15(1), pages 1-31, 03.
  19. 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.
  20. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  21. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Journal of Public Economics, Elsevier, Elsevier, vol. 71(3), pages 441-458, March.
  22. 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, Elsevier, vol. 52(3), pages 285-307, October.
  23. 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.
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Citations

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Cited by:
  1. Andreas Kappeler & Albert Solé-Ollé & Andreas Stephan & Timo Välilä, 2012. "Does fiscal decentralization foster regional investment in productive infrastructure?," ERSA conference papers ersa12p60, European Regional Science Association.
  2. Lenka Šťastná, 2009. "Spatial Interdependence of Local Public Expenditures: Selected Evidence from the Czech Republic," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2009/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2009.
  3. Frank M. Fossen & Ronny Freier & Thorsten Martin, 2014. "Race to the Debt Trap? Spatial Econometric Evidence on Debt in German Municipalities," Discussion Papers of DIW Berlin 1358, DIW Berlin, German Institute for Economic Research.
  4. Fenge, Robert & von Ehrlich, Maximilian & Wrede, Matthias, 2009. "Public input competition and agglomeration," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 39(5), pages 621-631, September.
  5. Shun-ichiro Bessho & Kimiko Terai, 2011. "Competition for private capital and central grants: the case of Japanese industrial parks," Economics of Governance, Springer, Springer, vol. 12(2), pages 135-154, June.
  6. Rainald Borck & Marco Caliendo & Viktor Steiner, 2007. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 63(2), pages 264-277, June.
  7. Yongzheng Liu & Jorge Martinez-Vazquez, 2011. "Public Input Competition, Stackelberg Equilibrium and Optimality," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1123, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  8. Matsumoto, Mutsumi & Feehan, James P., 2010. "Capital-tax financing and scale economies in public-input production," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 40(2-3), pages 116-121, May.
  9. Barreira, Ana, 2011. "Spatial Strategic Interaction on Public Expenditures of The Northern Portuguese Local Governments," Spatial and Organizational Dynamics Discussion Papers 2011-2, CIEO-Research Centre for Spatial and Organizational Dynamics, University of Algarve.
  10. Mutsumi Matsumoto, 2010. "Entry in tax competition: a note," International Tax and Public Finance, Springer, Springer, vol. 17(6), pages 627-639, December.

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