Local Policy Choice: Theory and Empirics
- (pp. 1378-1455)
Abstract
This paper critically surveys the growing literature on the policy choices of local governments. First, we identify various reasons for local government policy interactions, including fiscal competition, bidding for firms, yardstick competition, expenditure spillovers, and Tiebout sorting. We discuss theoretically what parameters should be estimated to determine the reason for competition among local governments. We emphasize how the policy outcomes emerging from this competition are affected by the presence of constraints imposed by higher-level governments. Second, we integrate theoretical and empirical analyses on the effects of fiscal decentralization on mobility, spillovers, fiscal externalities, economic outcomes, and distributional issues. Third, we identify key issues that arise in the empirical estimation of strategic interactions among local governments and highlight recent quasi-experimental evidence that has attempted to identify the mechanism at work. Finally, a synthesis model, containing multiple mechanisms and fiscal instruments, resolves some puzzles and provides guidance for future research.Citation
Agrawal, David R., William H. Hoyt, and John D. Wilson. 2022. "Local Policy Choice: Theory and Empirics." Journal of Economic Literature, 60 (4): 1378-1455. DOI: 10.1257/jel.20201490Additional Materials
JEL Classification
- D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- H20 Taxation, Subsidies, and Revenue: General
- H71 State and Local Taxation, Subsidies, and Revenue
- H72 State and Local Budget and Expenditures
- H73 State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
- H77 Intergovernmental Relations; Federalism; Secession
- R51 Finance in Urban and Rural Economies