Fiscal competition and the pattern of public spending

Much attention has been given to the impact of fiscal competition on the level of public expenditure, but relatively little to the impact on its composition. Using a broadly familiar and reasonably rich model of fiscal competition in the presence of mobile capital, this paper establishes a systematic bias in public spending patterns: starting from the non-cooperative equilibrium, and holding tax rates constant, welfare would be improved by a coordinated reduction in the provision of local public inputs and a corresponding increase in the public provision of local public goods benefiting immobile consumers. (C) 1997 Elsevier Science S.A.