LEADERS, FOLLOWERS, AND ASYMMETRIC LOCAL TAX POLICY DIFFUSION

Complementing recent theoretical models of tax competition with endogenous leadership, we empirically model local policy diffusion as a dynamic asymmetric process. Using a setting where local option sales taxes rapidly transitioned from nonexistence to ubiquity, we construct a policy leadership index to classify jurisdictions as leaders or followers. Using models that control for vertical tax competition effects, we show how asymmetric leader-follower dynamics characterize horizontal tax competition over the three decades that follow. A placebo test further supports our main conclusions. This methodological approach could be adapted to other settings where policies exhibit both extensive and intensive margins.