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Race to the debt trap? — Spatial econometric evidence on debt in German municipalities

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  • Borck, Rainald
  • Fossen, Frank M.
  • Freier, Ronny
  • Martin, Thorsten

Abstract

Through an intertemporal budget constraint, jurisdictions may gain advantages in tax and spending competition by ‘competing’ on debt. While the existing spatial econometric literature focuses on tax and spending competition, very little is known about spatial interaction via public debt. If jurisdictions compete for mobile capital to finance public spending, they may compete in debt levels as well as taxes. We use a theoretical model to derive the reaction of jurisdictions' debt levels to their neighbors' debts. We then estimate the spatial interdependence of public debt among German municipalities using a panel on municipalities in the two largest German states from 1999 to 2006. We find significant and robust interaction effects between debt levels of neighboring municipalities, which we compare to spatial tax and spending interactions. The results indicate that a municipality increases its per capita debt by 16–33 Euro as a reaction to an increase of 100 Euro in neighboring municipalities.

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  • Borck, Rainald & Fossen, Frank M. & Freier, Ronny & Martin, Thorsten, 2015. "Race to the debt trap? — Spatial econometric evidence on debt in German municipalities," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 20-37.
  • Handle: RePEc:eee:regeco:v:53:y:2015:i:c:p:20-37
    DOI: 10.1016/j.regsciurbeco.2015.04.003
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    Cited by:

    1. Felix Rösel, 2017. "The Political Economy of Fiscal Supervision and Budget Deficits: Evidence from Germany," Fiscal Studies, Institute for Fiscal Studies, vol. 38, pages 641-666, December.
    2. Eckhard Janeba & Maximilian Todtenhaupt, 2016. "Fiscal Competition and Public Debt," CESifo Working Paper Series 6155, CESifo Group Munich.
    3. Christofzik, Désirée I. & Kessing, Sebastian G., 2014. "Fiscal Supervision and the Soft Budget Constraint: Evidence from Germany," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100315, Verein für Socialpolitik / German Economic Association.
    4. Niklas Potrafke & Marina Riem & Christoph Schinke, 2016. "Debt Brakes in the German States: Governments’ Rhetoric and Actions," German Economic Review, Verein für Socialpolitik, vol. 17(2), pages 253-275, May.
    5. Frank M. Fossen & Thorsten Martin, 2016. "Entrepreneurial Spillovers over Space and Time," Discussion Papers of DIW Berlin 1618, DIW Berlin, German Institute for Economic Research.
    6. Dilla, Diana, 2017. "Staatsverschuldung und Verschuldungsmentalität
      [Public Debt and Debt Mentality]
      ," MPRA Paper 79432, University Library of Munich, Germany.
    7. Désirée Christofzik & Sebastian Kessing, 2014. "Does Fiscal Oversight Matter?," CESifo Working Paper Series 5023, CESifo Group Munich.
    8. Felix Rösel, 2014. "Co-Partisan Buddies or Partisan Bullies? Why State Supervision of Local Government Borrowing Fails," ifo Working Paper Series 189, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    9. Rösel, Felix, 2016. "The Persistency of Public Debt," Annual Conference 2016 (Augsburg): Demographic Change 145595, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Public debt; Tax and spending competition; Municipality data; Spatial interactions; Spatial panel estimation;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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