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Yardstick competition in German municipalities

Jan Finken

No 09-3, FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge from University of Cologne, FiFo Institute for Public Economics

Abstract: Does increasing transparency improve fiscal policy behavior of local governments? One way this could take place is via Yardstick Competition between incumbents of neighboring municipalities. This paper contributes to the literature by introducing a simple model which employs probabilistic voting to show the effect of Yardstick Competition on the amount of political rents diverted from the tax revenue. Since additional rents lower the probability of being reelected, the incumbent will reduce equilibrium rents if voters use information on fiscal performance in similar municipalities to evaluate the incumbent's quality. I test this hypothesis on a panel dataset of municipal budget and electoral data in the german state of Northrine-Westphalia. I show evidence for Yardstick Competition in the local business and property tax rates.

Keywords: transparency; local public finance; political economics; spatial econometrics (search for similar items in EconPapers)
JEL-codes: H71 H73 R59 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:uoccpe:093

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