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Yardstick Competition and Policy Innovation

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  • Rincke, Johannes

Abstract

A simple model of yardstick competition between jurisdictions is presented. Governments of jurisdictions face the alternative to choose between an old and a new policy with stochastic payoffs. The new policy is superior to the old policy in one state of the world, and inferior in the other. Governments are either benevolent, serving the interest of the voter, or rent-seeking. An equilibrium with yardstick competition is shown to exist where bad governments having a good government in their neighborhood choose the new policy more often compared to an equilibrium without relative performance evaluation. Overall, the probability of policy innovations is increased by yardstick competition. The model has a testable empirical implication saying that policy innovations should show spatial correlation. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-11.

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Date of creation: 2005
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Handle: RePEc:zbw:zewdip:2901

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  1. Paul Belleflamme & Jean Hindriks, 2001. "Yardstick Competition and Political Agency Problems," Working Papers 441, Queen Mary, University of London, School of Economics and Finance.
  2. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2003. "In search of yardstick competition: a spatial analysis of Italian municipality property tax setting," Journal of Urban Economics, Elsevier, vol. 54(2), pages 199-217, September.
  3. Timothy Besley & Anne Case, 1992. "Incumbent Behavior: Vote Seeking, Tax Setting and Yardstick Competition," NBER Working Papers 4041, National Bureau of Economic Research, Inc.
  4. Christos Kotsogiannis & Robert Schwager, 2006. "Political Uncertainty and Policy Innovation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(5), pages 779-805, December.
  5. Besley, Timothy J. & Smart, Michael, 2002. "Does Tax Competition Raise Voter Welfare?," CEPR Discussion Papers 3131, C.E.P.R. Discussion Papers.
  6. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-35, December.
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Cited by:
  1. Wohlgemuth, Michael, 2007. "Learning through institutional competition," Freiburg Discussion Papers on Constitutional Economics 07/9, Walter Eucken Institut e.V..
  2. Johannes Rincke, 2006. "Policy innovation in local jurisdictions: Testing for neighborhood influence in school choice policies," Public Choice, Springer, vol. 129(1), pages 189-200, October.
  3. Wohlgemuth, Michael, 2011. "The boundaries of the state," Freiburg Discussion Papers on Constitutional Economics 11/3, Walter Eucken Institut e.V..

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