The taming of Leviathan: Competition among governments

This paper assesses the consequences of a high degree of international capital mobility for the behavior of governments. It is argued that countries can be seen as clubs where the government as club management acts as an entrepreneur attempting to attract internationally mobile resources. Within this stylized model it is shown that competition induces the government of a small democratic country to implement policy reforms that increase the welfare of domestic residents if it wants to be reelected. This result suggests that international openness may be a substitute for more overt attempts to contain a government's Leviathan tendencies such as constitutional amendments. Finally, the case against competition among governments is analyzed from the perspective of the club model developed in the paper. An earlier version of this paper appeared as Kiel Working Paper No. 458. The author would like to thank Hartmut Kliemt, Werner Pommerehne, Helmut Reisen, Pierre Salmon, Horst Siebert, Viktor Vanberg as well as seminar participants at the University of Munich, the Free University of Berlin, the OECD Development Centre in Paris and at the 1991 meeting of the European Public Choice Society in Beaune for helpful comments. All remaining errors are mine.