Local Policy Choice: Theory and Empirics

109 Pages Posted: 24 Mar 2020 Last revised: 17 Oct 2020

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

William H. Hoyt

University of Kentucky

John Douglas Wilson

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: February 20, 2020

Abstract

This paper critically surveys the growing literature on the policy choices of local governments. First, we identify various reasons for local government policy interactions, including fiscal competition, bidding for firms, yardstick competition, expenditure spillovers, and Tiebout sorting. We discuss theoretically what parameters should be estimated to determine the reason for competition among local governments. We emphasize how the policy outcomes emerging from this competition are affected by the presence of constraints imposed by higher-level governments. Second, we integrate theoretical and empirical analyses on the effects of fiscal decentralization on mobility, spillovers, fiscal externalities, economic outcomes, and distributional issues. Third, we identify key issues that arise in the empirical estimation of strategic interactions among local governments and highlight recent quasi-experimental evidence that has attempted to identify the mechanism at work. Finally, a synthesis model, containing multiple mechanisms and fiscal instruments, resolves some puzzles and provides guidance for future research.

Keywords: fiscal competition, yardstick competition, spillovers, strategic policy interdependence, reaction functions, local public finance

JEL Classification: H2, H4, H7, R5

Suggested Citation

Agrawal, David R. and Hoyt, William H. and Wilson, John Douglas, Local Policy Choice: Theory and Empirics (February 20, 2020). Available at SSRN: https://ssrn.com/abstract=3545542 or http://dx.doi.org/10.2139/ssrn.3545542

David R. Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

433 Patterson Office Tower
Lexington, KY 40506-0027
United States
859-257-8608 (Phone)

HOME PAGE: http://www.uky.edu/~drag222/

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

HOME PAGE: http://www.uky.edu/~drag222/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

HOME PAGE: http://www.uky.edu/~drag222/

William H. Hoyt

University of Kentucky

Lexington, KY 40506
United States

John Douglas Wilson

affiliation not provided to SSRN

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