Inter-jurisdiction migration and the fiscal policies of local governments

This paper first analyzes a fiscal-policy game between two jurisdictions connected by mutual migration and obtains two main results. (i) As the mutual migration intensifies, both jurisdictions in the Nash equilibrium choose more public consumption, less public investment and more total spending, and finance the total spending entirely with debt. (ii) While the Nash equilibrium without any restriction on local government debts is characterized by too much public consumption, too little public investment and excessive debt, the first-best allocation can be achieved through Nash play by imposing the restriction that public consumption should only be financed by a contemporary tax and not by borrowing. These two results are shown to remain valid in an alternative model. The paper then goes on to analyze a model with one-directional migration and obtains results on how migration affects the fiscal policies of both the jurisdiction of migration destination and the jurisdiction of migration origin. Finally, there are a series of robustness checks to investigate the importance of various assumptions regarding the underlying environment.