From Economic to Legal Competition

From Economic to Legal Competition

New Perspectives on Law and Institutions in Europe

New Horizons in Law and Economics series

Edited by Alain Marciano and Jean-Michel Josselin

The idea of legal competition as a decentralized market process of law provision in which legal clubs compete, has earned an indisputable legitimacy among economists. This book presents a debate concerning the merits of and conditions for a competitive provision of law, with a special focus on institutions in Europe.

Chapter 5: Tax mimicking among regional jurisdictions

Lars P. Feld, Jean-Michel Josselin and Yvon Rocaboy

Subjects: economics and finance, public finance, law - academic, european law


Lars P. Feld, Jean-Michel Josselin and Yvon Rocaboy INTRODUCTION Since Tiebout (1956), the focus of models of fiscal federalism has been mainly on the mechanisms and properties of market-like competition between institutions or jurisdictions. In a survey of the literature, Wilson (1999) has pointed out that such a competition for mobile production factors between jurisdictions may well lead to a race to the bottom in tax rates. However, authors like Salmon (1987) and Besley and Case (1995) have used alternative or complementary explanations of public decision-making processes in a setting of fiscal federalism. A tool of labour economics (Holmstrom, 1982) and of the economics of the firm (Shleifer, 1985), yardstick competition thus has gained attention as a very insightful concept in the field of public economics. In a world of imperfect and asymmetric information, voters have restricted possibilities to assess the performance of the representatives in their polity. Selfish representatives aim at obtaining political rents and hence have incentives to keep information about their opportunistic behaviour hidden from voters. However, voters can draw inferences on politicians’ behaviour by comparing it to the performance of governments and parliaments in neighbouring jurisdictions. Other things being equal, these neighbours serve as yardsticks for the voters’ evaluation. A worse performance in their own jurisdiction compared to other jurisdictions could lead to the punishment of representatives by throwing them out of office in the next elections. As a consequence, public choices would not only be driven by information gathering from neighbouring jurisdictions, but also by...

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