Local Fiscal Competition: an Intraregional Perspective

Abstract

This article extends the theoretical literature on local fiscal competition by concentrating on a form of this behavior that has largely been ignored in the past: intraregional competition. This is competition between political jurisdictions that share physical boundaries; that is, they occupy the same physical space, or are 100% overlapping Under this form of competition, which is essentially a close economy model, issues such as capital flight cannot arise, and so one is free to concentrate on purely internal effects. The author demonstrates that, under certain reasonable conditions, local public goods provision in this framework will more closely approximate first-best levels than will those that arise under the assumption of distortionary commodity taxation.