Feld, Lars P.; Josselin, Jean-Michel; Rocaboy, Yvon --- "Tax mimicking among regional jurisdictions" [2003] ELECD 69; in Marciano, Alain; Josselin, Jean-Michel (eds), "From Economic to Legal Competition" (Edward Elgar Publishing, 2003)

Book Title: From Economic to Legal Competition

Editor(s): Marciano, Alain; Josselin, Jean-Michel

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843760061

Section: Chapter 5

Section Title: Tax mimicking among regional jurisdictions

Author(s): Feld, Lars P.; Josselin, Jean-Michel; Rocaboy, Yvon

Number of pages: 16

Extract:

5. Tax mimicking among regional
jurisdictions
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 institu-
tions or jurisdictions. In a survey of the literature, Wilson (1999) has pointed
out that such a competition for mobile production factors between jurisdic-
tions 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 comple-
mentary explanations of public decision-making processes in a setting of fiscal
federalism. A tool of labour economics (Holmstrom, 1982) and of the econom-
ics 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 incen-
tives 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 neigh-
bouring jurisdictions. Other things being equal, these neighbours serve as
yardsticks for the voters' evaluation. A worse performance in their own juris-
diction compared to other jurisdictions could lead to the punishment of repre-
sentatives by throwing them out of office in the next elections. As a
...