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Fiscal Competition and the Composition of Public Spending: Theory and Evidence

  • Borck, Rainald

    ()

    (University of Potsdam)

  • Caliendo, Marco

    ()

    (University of Potsdam)

  • Steiner, Viktor

    ()

    (Free University of Berlin)

In this paper, we consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods, one which benefits mobile skilled workers and one which benefits immobile unskilled workers. We derive the jurisdictions’ reaction functions for different spending categories. We then estimate these reaction functions using data from German communities. Thereby we explicitly allow for a spatially lagged dependent variable and a possible spatial error dependence by applying a generalized spatial two-stage least squares (GS2SLS) procedure. The results show that there is significant interaction between spending of neighbouring counties in Germany.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2428.

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Length: 18 pages
Date of creation: Nov 2006
Date of revision:
Publication status: published in: FinanzArchiv, 2007, 63 (2), 264-277
Handle: RePEc:iza:izadps:dp2428
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  6. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
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  8. Kelejian, Harry H & Prucha, Ingmar R, 1998. "A Generalized Spatial Two-Stage Least Squares Procedure for Estimating a Spatial Autoregressive Model with Autoregressive Disturbances," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 99-121, July.
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  13. Rainald Borck & Marco Caliendo & Viktor Steiner, 2007. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(2), pages 264-277, June.
  14. Hunt, Jennifer, 2000. "Why Do People Still Live in East Germany?," IZA Discussion Papers 123, Institute for the Study of Labor (IZA).
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