From Taxes to Politics, from Politics to Taxes: Evidence of Yardstick Competition in the Italian Municipalities

Ilaria Petrarca and Fabio Padovano

Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS from Condorcet Center for political Economy

Abstract: Strategic interaction in local tax setting is motivated with yardstick competition only when the fiscal decision influences the incumbents’ probability of being re-elected. Most of the previous analyses draw conclusions on yardstick competition without estimating this link or failing to find any empirical support for it. This paper, on the contrary, conducts a comprehensive test of yardstick competition on Italian Municipalities during the period 1995-2004. First, a vote popularity function is estimated. The empirical findings verify the economic voting behavior and are robust to alternative empirical specifications of the dependent variable. Then, a spatial tax setting equation is estimated. The results show a pattern of mimicking driven by a positive spatial lag coefficient and a negative spatial error coefficient. Finally, the estimated spatial correlation coefficients in time are used to investigate the dynamics of strategic interaction. The results depict a quasi monotonic pattern of convergence of the coefficients towards the lowest levels of spatial interaction, suggesting that a progressive reduction of the mimicking behavior of the incumbents has taken place.

Keywords: Yardstick competition; vote popularity function; spatial panel regression (search for similar items in EconPapers)
JEL-codes: C21 D72 H71 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-cdm, nep-pbe and nep-pol
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Citations: View citations in EconPapers (3)

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