Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy |
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| Institution: | 1. Department of Economics, The Pennsylvania State University, University Park, PA 16802, USA;2. Department of Economics, National Tsing Hua University, Hsinchu 30013 Taiwan;1. Department of Economics, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei 10617, Taiwan, ROC;2. Department of Economics, Brown University, 64 Waterman St, Providence, RI 02912, USA;1. Vanderbilt University, Nashville, TN 37235, United States;2. National Tsing Hua University, Taiwan;3. ICREA-University of Pompeu Fabra, Barcelona GSE and CREI, Spain |
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| Abstract: | This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la Osborne and Slivinski, 1996, Besley and Coate, 1997. As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity. |
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