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Mergers in Fiscal Federalism


  • Marie-Laure Breuillé
  • Skerdilajda Zanaj


This paper analyzes mergers of regions in a two-tier setting with both horizontal and vertical tax competition. The merger of regions induces three effects on regional and local tax policies, which are transmitted both horizontally and vertically: i) an alleviation of tax competition at the regional level, ii) a rise in the regional tax base, and iii) a larger internalization of tax externalities generated by cities. It is shown that the merger of regions increases regional tax rates while decreasing local tax rates. This Nash equilibrium with mergers is then compared with the Nash equilibrium with coalitions of regions.

Suggested Citation

  • Marie-Laure Breuillé & Skerdilajda Zanaj, 2010. "Mergers in Fiscal Federalism," INRA UMR CESAER Working Papers 2010/6, INRA UMR CESAER, Centre d'’Economie et Sociologie appliquées à l'’Agriculture et aux Espaces Ruraux.
  • Handle: RePEc:ceo:wpaper:24

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    References listed on IDEAS

    1. Keen, Michael J. & Kotsogiannis, Christos, 2004. "Tax competition in federations and the welfare consequences of decentralization," Journal of Urban Economics, Elsevier, vol. 56(3), pages 397-407, November.
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    4. Lisa Grazzini & Alessandro Petretto, 2007. "Tax Competition between Unitary and Federal Countries," Economics of Governance, Springer, vol. 8(1), pages 17-36, January.
    5. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
    6. Hoyt, William H., 2001. "Tax Policy Coordination, Vertical Externalities, and Optimal Taxation in a System of Hierarchical Governments," Journal of Urban Economics, Elsevier, vol. 50(3), pages 491-516, November.
    7. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    8. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
    9. 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.
    10. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    11. Lisa Grazzini & Tanguy Van Ypersele, 2003. "Fiscal Coordination and Political Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 305-325, April.
    12. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
    13. Sam Bucovetsky, 2009. "An index of capital tax competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 727-752, December.
    14. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, April.
    15. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    16. Breuillé, Marie-Laure & Vigneault, Marianne, 2010. "Overlapping soft budget constraints," Journal of Urban Economics, Elsevier, vol. 67(3), pages 259-269, May.
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    Cited by:

    1. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, Elsevier.
    2. Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.

    More about this item


    Mergers; Tax Competition; Fiscal Federalism;

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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