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Yardstick competition in German municipalities


  • Finken, Jan


Does increasing transparency improve fiscal policy behavior of local governments? One way this could take place is via Yardstick Competition between incumbents of neighboring municipalities. This paper contributes to the literature by introducing a simple model which employs probabilistic voting to show the effect of Yardstick Competition on the amount of political rents diverted from the tax revenue. Since additional rents lower the probability of being reelected, the incumbent will reduce equilibrium rents if voters use information on fiscal performance in similar municipalities to evaluate the incumbent's quality. I test this hypothesis on a panel dataset of municipal budget and electoral data in the german state of Northrine-Westphalia. I show evidence for Yardstick Competition in the local business and property tax rates.

Suggested Citation

  • Finken, Jan, 2009. "Yardstick competition in German municipalities," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 09-3, University of Cologne, FiFo Institute for Public Economics.
  • Handle: RePEc:zbw:uoccpe:093

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    References listed on IDEAS

    1. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2004. "Yardstick competition in intergovernmental relationships: theory and empirical predictions," Economics Letters, Elsevier, vol. 83(3), pages 325-333, June.
    2. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April.
    3. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February.
    4. John Ashworth & Benny Geys & Bruno Heyndels, 2005. "Government Weakness and Local Public Debt Development in Flemish Municipalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 395-422, August.
    5. Núria Bosch & Albert Solé-Ollé, 2007. "Yardstick competition and the political costs of raising taxes: An empirical analysis of Spanish municipalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(1), pages 71-92, February.
    6. Paul Belleflamme & Jean Hindriks, 2005. "Yardstick competition and political agency problems," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 24(1), pages 155-169, September.
    7. Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 493-513, August.
    8. Anselin, Luc & Bera, Anil K. & Florax, Raymond & Yoon, Mann J., 1996. "Simple diagnostic tests for spatial dependence," Regional Science and Urban Economics, Elsevier, vol. 26(1), pages 77-104, February.
    9. Roger Congleton, 2007. "Informational limits to democratic public policy: The jury theorem, yardstick competition, and ignorance," Public Choice, Springer, vol. 132(3), pages 333-352, September.
    10. Atif Mian, 2008. "Incentives in Markets, Firms, and Governments," Journal of Law, Economics, and Organization, Oxford University Press, vol. 24(2), pages 273-306, October.
    11. Edmark, Karin & Ågren, Hanna, 2008. "Identifying strategic interactions in Swedish local income tax policies," Journal of Urban Economics, Elsevier, vol. 63(3), pages 849-857, May.
    12. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2003. "In search of yardstick competition: a spatial analysis of Italian municipality property tax setting," Journal of Urban Economics, Elsevier, vol. 54(2), pages 199-217, September.
    13. Bivand, Roger & Szymanski, Stefan, 1997. "Spatial dependence through local yardstick competition:: theory and testing," Economics Letters, Elsevier, vol. 55(2), pages 257-265, August.
    14. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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    More about this item


    transparency; local public finance; political economics; spatial econometrics;

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R59 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Other


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