How Tame Will Leviathan Become in Institutional Competition – Competition Among Governments in the Provision of Public Goods

This article critically examines thehypothesis of Brennan and Buchanan that competition amonggovernments in the provision of publicgoods can serve as a substitute forconstitutional constraints on governments.Since Leviathan-type governments withfree choice of tax instruments will be ableto escape competitive pressure by shiftingtaxes to immobile factors, one could thinkof a rule of competition which prohibitstaxes on immobile factors. Indeed, such arule leads to a Nash-equilibriumwhere the tax burden lies on the mobilefactor. However, net income of the citizensmay or may not increase as a result fromsuch a rule, depending on a number ofvariables presented in this article. Acomplete substitution of constitutionalconstraints by the rule of competition may,depending on the same variables, evendecrease net income. Moreover, somepotential for increases in net income maybe forgone, since capital allocation andthe supply of public goods will usually beinefficient in equilibrium. Finally,applying the rule in a real-worldenvironment will be difficult and may evenlead to further serious inefficiencies. Forthese reasons, such a rule will hardly everbe introduced. Hence, competition amonggovernments cannot be viewed as a propersubstitute for constitutional constraints.Whoever is afraid of Leviathan shouldthus not rely on competition amonggovernments (alone).