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Fiscal competition over taxes and public inputs

Sebastian Hauptmeier, Ferdinand Mittermaier and Johannes Rincke ()

Regional Science and Urban Economics, 2012, vol. 42, issue 3, 407-419

Abstract: Governments are widely perceived as competing for capital by choosing parameters in a multi-dimensional policy space. We consider the choice of a business tax rate as well as a productive public input by local governments and estimate a model of strategic interaction in both policy instruments. The estimations suggest that local governments use both the business tax rate and public inputs to compete for capital. We find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending.

Keywords: Tax competition; Public input competition; System estimation (search for similar items in EconPapers)
JEL-codes: H72 H77 C72 (search for similar items in EconPapers)
Date: 2012
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