Political cycles, spatial interactions and yardstick competition: evidence from Italian cities

I aim to identify the presence of spatial interactions among local governments by exploiting a novel strategy. Specifically, I take advantage of the political cycle of Italian municipalities over the period of 2001-2011 to isolate the effect of the spending decisions of one municipality on neighboring municipalities. The results of this analysis point to the presence of strategic interactions between neighboring municipalities and indicate that such fiscal behavior is more pronounced during electoral years compared to non-electoral ones, when municipalities are governed by coalitions backed by a small majority, and in cities guided by a mayor who can run for re-election. Taken together, these results suggest that the observed spatial dependence in spending decisions seems to be consistent with the yardstick competition hypothesis.