Handbook of Fiscal Federalism
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Handbook of Fiscal Federalism

Edited by Ehtisham Ahmad and Giorgio Brosio

This major Handbook addresses fiscal relations between different levels of government under the general rubric of ‘fiscal federalism’, providing a review of the latest literature as well as an invaluable guide for practitioners and policy makers seeking informed policy options. The contributors include leading lights in the field, many of whom have themselves made seminal contributions to the literature.
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Chapter 2: Horizontal Competition Among Governments

Pierre Salmon


Pierre Salmon1 Introduction Governments situated on the same level of a multilevel governmental system compete with one another as well as with those higher or lower in the hierarchy. Except for a few remarks towards the end, this chapter is concerned with horizontal competition only. The proposition that governments on the same tier compete among themselves – horizontal competition – is now widely accepted. This was not always the case. In many models or discussions of local government and finance, as well as of decentralization and federalism, competition had no place or, more often, played only an implicit role. An obstacle to perceiving competition is that it can take many forms. The rivalry between Airbus and Boeing is intense. It would be difficult to deny its existence, which is ascertainable from the competitors’ awareness of it and from their revealed behaviour. To visualize competition in an equilibrium situation in which decision makers are price takers, though, one must raise hypothetical questions such as what would happen if a supplier were to price its product above the market price. Another intellectual obstacle is the presence and necessity of coordination. It must be stressed that competition among governments as well as among business firms does not preclude coordination (Breton 1996). Two automobile firms may coordinate their actions on various dimensions, and even cooperate on some well-defined projects, without the overall competition between them ceasing to be intense. The same is true of governments. Yardstick competition, which will play an important role in the analysis...

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