Spatial fiscal interactions among French municipalities within inter-municipal groups

Based on a unique data set of French municipalities and a large number of budgetary variables, we estimate the extent of spatial fiscal interaction among the 33,484 French municipalities in 2008 by accounting for inter-municipal cooperation. Using a spatial autoregressive model with inter-municipal group fixed effects, we show that spatial interactions among French municipalities are inflated by correlated effects that affect similarly municipalities that cooperate together. Removing these confounding effects leads to considerably smaller positive spatial interactions for tax decisions and even negative ones for capital expenditures. In addition, we observe a clear distinction between complementary choices on current budget items and substitutable choices on capital budget items.