Tragedy of the fiscal common? Fiscal stock externalities in a leviathan model of federalism

The paper deals with vertical tax competition between self-interested governments in a dynamic environment. In a federation, competition between the federal and the state governments arises when tax sources are not separated but pooled. Since dynamic inefficiencies will be stressed, the focus is on fiscal stock externalities rather than on flow externalities. The paper shows that the Leviathans in a federation tax the fiscal common resource more extensively than the single Leviathan in a unitary state. Furthermore, the positive impact of political stability on public consumption of the fiscal common will be discussed.