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Fiscal competition over taxes and public inputs

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  • Hauptmeier, Sebastian
  • Mittermaier, Ferdinand
  • Rincke, Johannes

Abstract

Governments are widely perceived as competing for capital by choosing parameters in a multi-dimensional policy space. We consider the choice of a business tax rate as well as a productive public input by local governments and estimate a model of strategic interaction in both policy instruments. The estimations suggest that local governments use both the business tax rate and public inputs to compete for capital. We find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending.

Suggested Citation

  • Hauptmeier, Sebastian & Mittermaier, Ferdinand & Rincke, Johannes, 2012. "Fiscal competition over taxes and public inputs," Regional Science and Urban Economics, Elsevier, vol. 42(3), pages 407-419.
    • Handle: RePEc:eee:regeco:v:42:y:2012:i:3:p:407-419
    DOI: 10.1016/j.regsciurbeco.2011.10.007
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    More about this item

    Keywords

    Tax competition; Public input competition; System estimation;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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