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Edited by Francesco Forte, Ram Mudambi and Pietro Maria Navarra
Chapter 14: How significant is yardstick competition among governments? Three reasons to dig deeper
Yardstick competition among governments occurs when, to remain in office, incumbents attempt to make the government they lead as well placed as possible in the cross-jurisdiction comparisons that are, or could be, made by their 'own' voters. Its relevance stems from voters being in a situation of information asymmetry vis-à-vis incumbents. Ordinary voters cannot directly observe the cost of the services governments provide or whether decisions made are the best ones given the circumstances. Yardstick competition cannot eliminate information asymmetry but it may mitigate its consequences. The mechanism was presented informally in Salmon (1987). Following Besley and Case (1995), it became an object of theoretical elaboration and empirical investigation, mainly in the domain of fiscal federalism. The empirical studies (largely based on spatial econometrics) are particularly innovative and impressive. Thanks to them it is now well confirmed empirically that yardstick competition among local or regional governments can have a significant influence on their fiscal decisions (taxation and expenditures) and/or on the way these decisions affect the electoral prospects and popularity of incumbents. For a mechanism to be significant in that sense is important if it is to be more than potentially interesting (Bordignon et al. 2003, p. 215). If such significance had not been established, yardstick competition would not have attracted the attention of a relatively sizeable number of researchers. Yet, I will try to show that the significance of yardstick competition among governments is both broader and more profound than that investigated empirically so far.
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