Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 5: Geografiscal federalism
In the past two decades, public economists have increasingly employed spatial econometrics techniques to investigate the phenomenon of horizontal and vertical competition among governments in multi-tiered public sector structures. The use of geographical concepts and methods in empirical work on fiscal federalism – geografiscal federalism – is justified by the idea that space is an important aspect of multi-tiered fiscal arrangements, as witnessed by the plethora of theoretical work based on the two most prominent spatial concepts in public economics – Oates’ decentralization theorem and the Tiebout sorting mechanism – as well as by the common finding that decentralized fiscal policies tend to exhibit positive spatial autocorrelation. As discussed in Revelli (2006), the mainstream view among applied public economists through the 1990s and the early 2000s was that spatial econometrics provided powerful tools to identify substantive strategic interaction among decentralized decision-makers, and promised to be able to discriminate economically relevant processes of competition (substantive interaction) from the physiological correlation in local government budgetary data that is mechanically driven by purely geographical factors that have no behavioral significance (omitted variables in the empirical model). In addition, applied public economists have for over a decade set themselves the ambitious task of identifying the root cause of interaction, that is, determining what kind of economic process is at work when local policies exhibit spatial autocorrelation: tax competition, yardstick competition, or benefit spillovers from decentralized provision of public services.
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