Federal Competition and Economic Growth
Stanford University Graduate School of Business Research Paper No. 2038
Rock Center for Corporate Governance at Stanford University Working Paper No. 63
39 Pages Posted: 6 Oct 2009
Date Written: September 16, 2009
Abstract
We examine the question of how competition between governments within metropolitan areas affects economic growth outcomes. Using data on metropolitan statistical areas (MSAs) in the United States, we find that the number of county governments is significantly and positively correlated with the average annual growth rate of income per employee over 1969-2006. Exploiting exogenous variation in the natural topography of our MSAs to instrument for the number of county governments, we find evidence supporting a causal interpretation of the effect of inter-jurisdictional competition on economic growth. Furthermore, our estimates suggest that not accounting for the endogeneity of interjurisdictional competition may lead to systematic underestimation of its growth-enhancing benefits. A natural question is whether our findings merely reflect some form of reversion to the mean. Quite to the contrary, we find that higher inter-jurisdictional competition was already associated with higher income in 1969, and that the disparity only grew over the intervening 37 years.
Keywords: Economic Development, Public Policy
JEL Classification: H77, H11
Suggested Citation: Suggested Citation
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