How significant are fiscal interactions in designing federations?: a meta-regression analysis

The economics literature has traditionally advocated that “governments compete”, and hence one should expect non-negligible fiscal interactions between and among different levels of government. This paper uses meta-regression analysis to quantify the size of inter-jurisdictional fiscal interactions and to explain the heterogeneity in empirical estimates. Our results suggest several robust findings. First, government level matters in influencing the extent of fiscal interactions. We find a non-monotonic relationship with much stronger interactions among municipalities and nations than among states. Second, horizontal tax interactions are, in general, stronger than expenditure interactions and vertical tax interactions, though this varies from country to country. Third, both tax competition and yardstick competition are supported by the data, though the former appears to produce stronger interactions than the latter. Fourth, capital controls, voter turnout and the extent of decentralization all shape fiscal interactions. Political competition and fiscal decentralization both increase horizontal tax competition and they decrease vertical tax competition. Finally, much of the variation between estimates can be explained by econometric specification and estimation strategies.