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Race to the Debt Trap?: Spatial Econometric Evidence on Debt in German Municipalities

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  • Frank M. Fossen
  • Ronny Freier
  • Thorsten Martin

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. This paper estimates 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 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.

Suggested Citation

  • Frank M. Fossen & Ronny Freier & Thorsten Martin, 2014. "Race to the Debt Trap?: Spatial Econometric Evidence on Debt in German Municipalities," Discussion Papers of DIW Berlin 1358, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1358
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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. Janeba, Eckhard & Todtenhaupt, Maximilian, 2018. "Fiscal competition and public debt," Journal of Public Economics, Elsevier, vol. 168(C), pages 47-61.
    3. Fossen, Frank M. & Martin, Thorsten, 2018. "Entrepreneurial dynamics over space and time," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 204-214.
    4. Christofzik, Désirée I. & Kessing, Sebastian G., 2018. "Does fiscal oversight matter?," Journal of Urban Economics, Elsevier, vol. 105(C), pages 70-87.
    5. Ge Gao & Xiuting Li & Xiaoting Liu & Jichang Dong, 2021. "Does Air Pollution Impact Fiscal Sustainability? Evidence from Chinese Cities," Energies, MDPI, vol. 14(21), pages 1-16, November.
    6. Christofzik, Désirée I. & Kessing, Sebastian G., 2014. "Fiscal Supervision and the Soft Budget Constraint: Evidence from Germany," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100315, Verein für Socialpolitik / German Economic Association.
    7. 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.
    8. Cong Yu & Linke Hou & Yuxia Lyu & Qi Zhang, 2022. "Political competition, spatial interactions, and default risk of local government debts in China," Papers in Regional Science, Wiley Blackwell, vol. 101(3), pages 717-743, June.
    9. Rösel, Felix, 2016. "The Persistency of Public Debt," VfS Annual Conference 2016 (Augsburg): Demographic Change 145595, Verein für Socialpolitik / German Economic Association.
    10. Ge Gao & Jichang Dong & Xiuting Li, 2022. "Local Government Debt, Real Estate Investment and Corporate Investment: Evidence from China," Sustainability, MDPI, vol. 14(19), pages 1-21, September.
    11. Potrafke Niklas & Riem Marina & Schinke Christoph, 2016. "Debt Brakes in the German States: Governments’ Rhetoric and Actions," German Economic Review, De Gruyter, vol. 17(2), pages 253-275, May.
    12. Niklas Potrafke & Felix Roesel, 2020. "The urban–rural gap in healthcare infrastructure: does government ideology matter?," Regional Studies, Taylor & Francis Journals, vol. 54(3), pages 340-351, March.
    13. Sebastian Langer, 2019. "Expenditure interactions between municipalities and the role of agglomeration forces: a spatial analysis for North Rhine-Westphalia," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 62(3), pages 497-527, June.
    14. Schreiber, Sven & Soldatenkova, Natalia, 2016. "Anticipating business-cycle turning points in real time using density forecasts from a VAR," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 166-187.
    15. 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.
    16. Zefeng Tang, 2022. "Local Government Debt, Financial Circle, and Sustainable Economic Development," Sustainability, MDPI, vol. 14(19), pages 1-29, September.
    17. Paulo Reis Mourao & Mihaela Bronić & Branko Stanić, 2020. "Discussing the determinants of online budget transparency based on a spatial regression analysis of Croatian cities and municipalities: Do good neighbours make you better?," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 23(3), pages 268-287, September.
    18. Rubo Zhao & Yixiang Tian & Ao Lei & Francis Boadu & Ze Ren, 2019. "The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach," Sustainability, MDPI, vol. 11(11), pages 1-22, May.
    19. Dilla, Diana, 2017. "Staatsverschuldung und Verschuldungsmentalität [Public Debt and Debt Mentality]," MPRA Paper 79432, University Library of Munich, Germany.
    20. Frank M. Fossen & Viktor Steiner, 2018. "The Tax†rate Elasticity of Local Business Profits," German Economic Review, Verein für Socialpolitik, vol. 19(2), pages 162-189, May.
    21. Dingzu Zhang & Xingjie Shen & Cong Peng, 2022. "National Audit, Media Attention, and Efficiency of Local Fiscal Expenditure: A Spatial Econometric Analysis Based on Provincial Panel Data in China," Sustainability, MDPI, vol. 15(1), pages 1-24, December.
    22. Shun‐ichiro Bessho & Yoko Ibuka, 2019. "Interdependency in vaccination policies among Japanese municipalities," Health Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 299-310, February.

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    More about this item

    Keywords

    public debt; tax and spending competition; municipality data; spatial interactions; spatial panel estimation;
    All these keywords.

    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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