Fiscal Competition and the Composition of Public Spending: Theory and Evidence

18 Pages Posted: 26 Nov 2006

See all articles by Rainald Borck

Rainald Borck

Humboldt University of Berlin - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Marco Caliendo

University of Potsdam; Institute for the Study of Labor (IZA)

Viktor Steiner

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research; IZA Institute of Labor Economics

Date Written: November 2006

Abstract

In this paper, we consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods, one which benefits mobile skilled workers and one which benefits immobile unskilled workers. We derive the jurisdictions' reaction functions for different spending categories. We then estimate these reaction functions using data from German communities. Thereby we explicitly allow for a spatially lagged dependent variable and a possible spatial error dependence by applying a generalized spatial two-stage least squares (GS2SLS) procedure. The results show that there is significant interaction between spending of neighbouring counties in Germany.

Keywords: tax competition, capital skill complementarity, public spending, spatial econometrics

JEL Classification: H77, J24, J61

Suggested Citation

Borck, Rainald and Caliendo, Marco and Steiner, Viktor, Fiscal Competition and the Composition of Public Spending: Theory and Evidence (November 2006). IZA Discussion Paper No. 2428, Available at SSRN: https://ssrn.com/abstract=947084

Rainald Borck (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

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Marco Caliendo

University of Potsdam ( email )

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Institute for the Study of Labor (IZA) ( email )

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Viktor Steiner

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research ( email )

P.O. Box 10 34 43
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Germany

IZA Institute of Labor Economics

P.O. Box 7240
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Germany

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