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Reaction or interaction? Spatial process identification in multi-tiered government structures

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Revelli Federico () (University of Turin)

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Abstract

This paper models horizontal and vertical fiscal externalities in a multi-tiered structure of government, and implements maximum likelihood (ML) and instrumental variables (IV) estimation techniques to identify the source of spatial dependence in English local government expenditures. The results show that upper tier (County) autority expenditure has two opposite effects on lower tier (District) authority spending decision. By raising the local property tax Burden, Countries reduce resources available to Districts and lower the demand for Discrict services by estimated elasticity of -0.45. On the other hand, Country services are estimated to be complements of District services, with an elasticity of 0.25. Moreover, when vertical fiscal externalities are explicity taken into account, the estimated magnitude of horizontal fiscal interactions is substantially reduced. The observed positive spatial auto-correlation among Districts can consequently be attributed to a large extent to common reaction to Country fiscal policies, rather than to actual strategic interaction.

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Paper provided by University of Turin in its series Department of Economics Working Papers with number 200202.

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Length: 35 pages
Date of creation: Feb 2002
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Handle: RePEc:uto:dipeco:200202

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  2. Gramlich, Edward M & Rubinfeld, Daniel L, 1982. "Micro Estimates of Public Spending Demand Functions and Tests of the Tiebout and Median-Voter Hypotheses," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 536-60, June. [Downloadable!] (restricted)
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  4. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers 1998003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  5. Anselin, Luc & Bera, Anil K. & Florax, Raymond & Yoon, Mann J., 1996. "Simple diagnostic tests for spatial dependence," Regional Science and Urban Economics, Elsevier, vol. 26(1), pages 77-104, February. [Downloadable!] (restricted)
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  7. Revelli, Federico, 2001. "Spatial Patterns in Local Taxation: Tax Mimicking or Error Mimicking?," Applied Economics, Taylor and Francis Journals, vol. 33(9), pages 1101-07, July. [Downloadable!] (restricted)
  8. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
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  9. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December. [Downloadable!] (restricted)
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  11. Bivand, Roger & Szymanski, Stefan, 1997. "Spatial dependence through local yardstick competition:: theory and testing," Economics Letters, Elsevier, vol. 55(2), pages 257-265, August. [Downloadable!] (restricted)
  12. Bivand, Roger & Szymanski, Stefan, 2000. "Modelling the spatial impact of the introduction of Compulsory Competitive Tendering," Regional Science and Urban Economics, Elsevier, vol. 30(2), pages 203-219, March. [Downloadable!] (restricted)
  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. Goodspeed, Timothy J., 2000. "Tax structure in a federation," Journal of Public Economics, Elsevier, vol. 75(3), pages 493-506, March. [Downloadable!] (restricted)
  15. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December. [Downloadable!] (restricted)
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  16. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May. [Downloadable!] (restricted)
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  18. Fredriksson, Per G. & Millimet, Daniel L., 2002. "Strategic Interaction and the Determination of Environmental Policy across U.S. States," Journal of Urban Economics, Elsevier, vol. 51(1), pages 101-122, January. [Downloadable!] (restricted)
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(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. Kristien Werck & Bruno Heyndels, 2007. "Programmatic choices and the demand for theatre: the case of Flemish theatres," Journal of Cultural Economics, Springer, vol. 31(1), pages 25-41, March. [Downloadable!] (restricted)
  2. Fredriksson, Per & Mamun, Khawaja, 2009. "Gubernatorial Reputation and Vertical Tax Externalities: All Smoke, No Fire?," Working Papers 2009002, Sacred Heart University, John F. Welch College of Business. [Downloadable!]
  3. Thomas H. Klier & Dan McMillen, 2005. "Clustering of auto supplier plants in the U.S.: GMM spatial logit for large samples," Working Paper Series WP-05-18, Federal Reserve Bank of Chicago. [Downloadable!]
  4. Rizzo, Leonzio, 2007. "Interaction between vertical and horizontal tax competition: evidence and some theory," MPRA Paper 8632, University Library of Munich, Germany, revised 2008. [Downloadable!]
  5. Marius BRÜLHART & Mario JAMETTI, 2004. "Vertical Versus Horizontal Tax Externalities: An Empirical Test," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.11, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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  6. Rizzo, Leonzio, 2005. "Interaction between Vertical and Horizontal tax Competition: Theory and Evidence," MPRA Paper 5334, University Library of Munich, Germany. [Downloadable!]
  7. Ruiz, Fernando & Gerard, Marcel, 2008. "Is there evidence of strategic corporate tax interaction among EU countries?," MPRA Paper 10094, University Library of Munich, Germany. [Downloadable!]
  8. Federico Revelli, 2004. "Performance Rating and Yardstick Competition in Social Service Provision," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  9. Martial Foucault & Thierry Madies & Sonia Paty, 2008. "Public spending interactions and local politics. Empirical evidence from French municipalities," Public Choice, Springer, vol. 137(1), pages 57-80, October. [Downloadable!] (restricted)
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