Fiscal Competition and Public Debt

38 Pages Posted: 9 Apr 2016 Last revised: 6 Mar 2018

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Maximilian Todtenhaupt

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2017


This paper explores the implications of high indebtedness for strategic tax setting in internationally integrated capital markets. When public borrowing is constrained due to default, a rise in a country's initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that country, while the opposite occurs elsewhere. On net a country with higher initial debt becomes a less attractive location. Using data from the universe of German municipalities in an event-study research design we present empirical evidence that is in line with the theoretical model. Our analysis sheds light on proposals to devolve taxing power to lower levels of governments which differ in initial debt levels.

Keywords: Asymmetric Tax Competition, Business Tax, Sovereign Debt, Inter-Jurisdictional Tax Competition

JEL Classification: H25, H63, H73, H87

Suggested Citation

Janeba, Eckhard and Todtenhaupt, Maximilian, Fiscal Competition and Public Debt (August 9, 2017). ZEW - Centre for European Economic Research Discussion Paper No. 16-013, Available at SSRN: or

Eckhard Janeba

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Maximilian Todtenhaupt (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045

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