Yardstick Competition in German Municipalities

FiFo-CPE Discussion Paper No. 09-3

31 Pages Posted: 18 Jan 2010

See all articles by Jan Finken

Jan Finken

affiliation not provided to SSRN

Date Written: December 18, 2009

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

JEL Classification: H71, H73, R59

Suggested Citation

Finken, Jan, Yardstick Competition in German Municipalities (December 18, 2009). FiFo-CPE Discussion Paper No. 09-3, Available at SSRN: https://ssrn.com/abstract=1538197 or http://dx.doi.org/10.2139/ssrn.1538197

Jan Finken (Contact Author)

affiliation not provided to SSRN ( email )

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