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Reaction or interaction? Spatial process identification in multi-tiered government structures

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Abstract

This paper models horizontal and vertical fiscal externalities in a multi-tiered structure of government, and implements maximum likelihood (ML) and instrumental variables (IV) estimation techniques to identify the source of spatial dependence in English local government expenditures. The results show that upper tier (County) autority expenditure has two opposite effects on lower tier (District) authority spending decision. By raising the local property tax Burden, Countries reduce resources available to Districts and lower the demand for Discrict services by estimated elasticity of -0.45. On the other hand, Country services are estimated to be complements of District services, with an elasticity of 0.25. Moreover, when vertical fiscal externalities are explicity taken into account, the estimated magnitude of horizontal fiscal interactions is substantially reduced. The observed positive spatial auto-correlation among Districts can consequently be attributed to a large extent to common reaction to Country fiscal policies, rather than to actual strategic interaction.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 200202.

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Length: 35 pages
Date of creation: May 2002
Handle: RePEc:uto:dipeco:200202
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