Tax Competition with Intermunicipal Cooperation

Abstract

We study local tax competition when municipalities can voluntarily cooperate with neighboring jurisdictions. In France, the strongest form of cooperation among municipalities occurs by forming an “establishment for inter-municipal cooperation” (EIMC). We study how interjurisdictional policy interdependence differs between competing municipalities within the same EIMC and competing municipalities outside of the cooperative unit. We apply the estimation strategy of Kelejian and Piras (2014) to resolve the endogeneity of the decision to cooperate with other municipalities. We find that strategic interactions among peer members of the same EIMC are less intense than strategic interactions with municipalities outside of the cooperative unit. Our empirical methods can be used to study strategic interactions with other cooperative groups, such as international trade agreements or firm distribution networks.

Keywords: tax competition, intermunicipal cooperation, spatial autoregressive models, endogenous weight matrix, local public finance, networks

JEL Classification: C2, H2, H7, R5