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

We consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods: one that benefits mobile skilled workers and one that benefits immobile unskilled workers. We derive the jurisdictions' reaction functions for different spending categori...

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Bibliographic Details
Published in:Finanzarchiv 2007-06, Vol.63 (2), p.264-277
Main Authors: Borck, Rainald, Caliendo, Marco, Steiner, Viktor
Format: Article
Language:English
Subjects:
Aggregate spending
capital-skill complementarity
Communities
Econometric models
Economic competition
Fiscal policy
Fiscal theory
Germany
Government spending
Income taxes
Jurisdiction
Local finance
Public expenditure
Public finance
Public goods
public spending
Real property taxes
Skilled labor
spatial econometrics
Spatial models
Tax competition
Taxes
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Summary:We consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods: one that benefits mobile skilled workers and one that 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 neighboring counties in Germany.
ISSN:0015-2218
1614-0974
DOI:10.1628/001522107x220107