Fiscal Competition and the Composition of Public Spending: Theory and Evidence
18 Pages Posted: 26 Nov 2006
Date Written: November 2006
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: Suggested Citation