Race to the Debt Trap? - Spatial Econometric Evidence on Debt in German Municipalities

41 Pages Posted: 24 Jan 2014 Last revised: 31 Jan 2014

See all articles by Frank M. Fossen

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Ronny Freier

German Institute for Economic Research (DIW Berlin)

Thorsten Martin

University of Potsdam

Date Written: January 20, 2014

Abstract

Through an intertemporal budget constraint, jurisdictions may gain advantages in tax and spending competition by 'competing' on debt. While the existing spatial econometric literature focuses on tax and spending competition, very little is known about spatial interaction via public debt. This paper estimates the spatial interdependence of public debt among German municipalities using a panel on municipalities in the two largest German states from 1999 to 2006. We find significant and robust interaction effects between debt of neighboring municipalities, which we compare to spatial tax and spending interactions. The results indicate that a municipality increases its per capita debt by 16-33 Euro as a reaction to an increase of 100 Euro in neighboring municipalities.

Keywords: public debt, tax and spending competition, municipality data, spatial interactions, spatial panel estimation

JEL Classification: C23, H63, H74, R12

Suggested Citation

Fossen, Frank M. and Freier, Ronny and Martin, Thorsten, Race to the Debt Trap? - Spatial Econometric Evidence on Debt in German Municipalities (January 20, 2014). DIW Berlin Discussion Paper No. 1358, Available at SSRN: https://ssrn.com/abstract=2383807 or http://dx.doi.org/10.2139/ssrn.2383807

Frank M. Fossen (Contact Author)

University of Nevada, Reno ( email )

1664 N. Virginia Street
Reno, NV 89557-0030
United States

HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=2906

Ronny Freier

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Thorsten Martin

University of Potsdam ( email )

August-Bebel Strasse 89
Potsdam, 14482
Germany

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