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Federal Competition and Economic Growth

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  • Hatfield, John William

    (Stanford University)

  • Kosec, Katrina

    (Stanford University)

Abstract

We examine the question of how competition between governments within metropolitan areas affects economic growth outcomes. Using data on metropolitan statistical areas (MSAs) in the United States, we find that the number of county governments is significantly and positively correlated with the average annual growth rate of income per employee over 1969-2006. Exploiting exogenous variation in the natural topography of our MSAs to instrument for the number of county governments, we find evidence supporting a causal interpretation of the effect of inter-jurisdictional competition on economic growth. Furthermore, our estimates suggest that not accounting for the endogeneity of inter-jurisdictional competition may lead to systematic underestimation of its growth-enhancing benefits. A natural question is whether our findings merely reflect some form of reversion to the mean. Quite to the contrary, we find that higher inter-jurisdictional competition was already associated with higher income in 1969, and that the disparity only grew over the intervening 37 years.

Suggested Citation

  • Hatfield, John William & Kosec, Katrina, 2009. "Federal Competition and Economic Growth," Research Papers 2038, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:2038
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    5. Miyazawa, Kazutoshi & Ogawa, Hikaru & Tamai, Toshiki, 2019. "Capital market integration and fiscal sustainability," European Economic Review, Elsevier, vol. 120(C).
    6. Banaszewska, Monika & Bischoff, Ivo & Bode, Eva & Chodakowska, Aneta, 2022. "Does inter-municipal cooperation help improve local economic performance? – Evidence from Poland," Regional Science and Urban Economics, Elsevier, vol. 92(C).
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    8. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    9. Hatfield, John William, 2015. "Federalism, taxation, and economic growth," Journal of Urban Economics, Elsevier, vol. 87(C), pages 114-125.
    10. Burret, Heiko T. & Feld, Lars P. & Schaltegger, Christoph A., 2022. "Fiscal federalism and economic performance new evidence from Switzerland," European Journal of Political Economy, Elsevier, vol. 74(C).
    11. Kazutoshi Miyazawa & Hikaru Ogawa & Toshiki Tamai, 2018. "Tax Competition and Fiscal Sustainability," CIRJE F-Series CIRJE-F-1103, CIRJE, Faculty of Economics, University of Tokyo.
    12. Cassidy, Traviss & Velayudhan, Tejaswi, 2022. "Government Fragmentation and Economic Growth," MPRA Paper 112045, University Library of Munich, Germany.
    13. Deng, Jiapin & Liu, Qiao, 2024. "Good finance, bad finance, and resource misallocation: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 159(C).
    14. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.
    15. Asatryan, Zareh & Feld, Lars P., 2015. "Revisiting the link between growth and federalism: A Bayesian model averaging approach," Journal of Comparative Economics, Elsevier, vol. 43(3), pages 772-781.
    16. Samuel Adams & Kingsley Agomor, 2020. "Decentralization, Partisan Politics, and National Development in Ghana," Public Organization Review, Springer, vol. 20(2), pages 351-366, June.
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    18. Kayode Taiwo, 2022. "Intergovernmental Transfers and Own Revenues of Subnational Governments in Nigeria," Hacienda Pública Española / Review of Public Economics, IEF, vol. 240(1), pages 31-59, March.
    19. Chu, Angus C. & Yang, C.C., 2012. "Fiscal centralization versus decentralization: Growth and welfare effects of spillovers, Leviathan taxation, and capital mobility," Journal of Urban Economics, Elsevier, vol. 71(2), pages 177-188.
    20. Tinglin Zhang & Bindong Sun & Yinyin Cai & Rui Wang, 2019. "Government fragmentation and economic growth in China’s cities," Urban Studies, Urban Studies Journal Limited, vol. 56(9), pages 1850-1864, July.
    21. Liu, Wai-Man & Ngo, Phong, 2020. "Voting with your feet: Political competition and internal migration in the United States," European Journal of Political Economy, Elsevier, vol. 65(C).
    22. Steven G. Craig & Edward C. Hoang, 2024. "Intra-city Tiebout: the economic consequences of crossed borders," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 73(3), pages 1005-1043, October.
    23. Smith, Heidi Jane M. & Revell, Keith D., 2016. "Micro-Incentives and Municipal Behavior: Political Decentralization and Fiscal Federalism in Argentina and Mexico," World Development, Elsevier, vol. 77(C), pages 231-248.

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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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