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Fiscal Competition

Author

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  • David E. Wildasin

    (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky)

Abstract

The theory of fiscal competition seeks to ascertain how fiscal policymaking is affected by competitive pressures faced by governments. This requires a theory of policy choice, and, as such, the theory of fiscal competition lies squarely in the realm of political economy. This essay presents a concise overview of some of the principal themes that have figured prominently in economic analyses of fiscal competition and identifies significant gaps that warrant further attention and that may occupy the attention of investigators in the years to come. It first sketches a model that has been used frequently in theoretical and empirical analyses of fiscal competition, emphasizing how fiscal policies affect the welfare (real incomes) of various groups and how these impacts depend on the mobility of resources. Subsequent sections address parts of the subject that are less well-settled, highlighting, for example, the fact that exit (or entry) options for mobile resources alters the payoffs from alternative fiscal policies among those who participate actively in the political process and, thus, participation incentives. Two intertemporal aspects of fiscal competition are emphasized: the determination of the "degree" of factor mobility, especially for the purposes of empirical analysis, and the issue of time-varying policies, commitment, and dynamic consistency. The paper also discusses the role of institutions, and particularly of higher- and lower-level governments (i.e., the vertical and horizontal structure of government), in fiscal competition.

Suggested Citation

  • David E. Wildasin, 2005. "Fiscal Competition," Working Papers 2005-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    • Handle: RePEc:ifr:wpaper:2005-05
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal Competition; Political Economy;

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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