Tax Competition With Intermunicipal Cooperation

David Agrawal, Marie-Laure Breuillé and Julie Le Gallo

National Tax Journal, 2025, vol. 78, issue 1, 5 - 43

Abstract: We study local tax competition when municipalities can voluntarily cooperate. We compare the intensity of interjurisdictional policy interdependence between competing municipalities within the same “establishment for intermunicipal cooperation” (EIMC) and competing municipalities outside of the cooperative unit. To resolve the endogeneity of the decision to cooperate, we apply the approach of Kelejian and Piras. The strategic response to the average tax rate among peer members of the same EIMC is less intense than the response to the average tax rate of municipalities outside of the cooperative unit. A 1 percentage point decrease in the average tax rate of nonmembers lowers the own-jurisdiction tax rate by 0.58 percentage points, while a 1-unit decrease in the tax rate of towns within the EIMC lowers the own-jurisdiction rate by 0.31 percentage points. Our empirical methods can be used to study strategic interactions within other cooperative groups, including supranational institutions such as the European Union.

Date: 2025
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Related works:
Working Paper: Tax Competition with Intermunicipal Cooperation (2024)
Working Paper: Tax competition with intermunicipal cooperation (2020)
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