Kenyon reviews theories of interjurisdictional competition (IJC).
First, Kenyon discusses issues underlying the discussion of the theories, including some definitions. This section of the notes deals with her discussion of these issues. Her discussion of the theories is summarized separately.
She starts with definitions of IJC.
What is interjurisdictional competition?
Three types/definitions:
Active rivalry:
rivalry among governments in which each government is trying to win some scarce beneficial resource or in which each government is seeking to avoid a particular cost (U.S. ACIR 1991, p. 9). (p. 14)
The use of tax or other incentives to attract or retain mobile businesses falls within this definition.
Implicit competition:
Interjurisdictional competition is the manner in which the free movement of goods, services, people and capital constrains the actions of independent governments in a federal system (ACIR 1991, p. 10). (p. 14)
For example, local governments may fear raising taxes since it might cause out-migration of businesses or high-income taxpayers.
These two definitions seem to be related to the two types of economic development incentives described by Fisher and Peters (1998). Active rivalry is related to Economic development tax expenditures (credits, exemptions, etc.) aimed specifically at stimulating private investment. Implicit competition is related to General tax policies aimed at not discouraging investment. Avoiding Shannon's (1991) six "sore thumbs".
Yardstick competition:
As described by Albert Breton,
(p. 14)if citizens of a jurisdiction use information about the
policies implemented in other jurisdictions to gauge and
evaluate the performance of their own government, that
process will increase electoral competition at home and
thus incite the governing politicians to act in their benefit
more than they would otherwise (Breton 1991, p. 40).
Implicit competition is related to Hirschman's concept of exit.
Yardstick competition is related to Hirschman's concept of voice.
The yardstick definition is the only one that is concerned with the jurisdiction's internal politics.
Finally, Kenyon only considers horizontal competition, that is interstate or interlocal competition between govt's with similar powers.
Preconditions for interjurisdictional competition
Kenyon quotes Boyne's three preconditions:
1. Competition is promoted by a fragmented structure . . . containing a large number of authorities. . . .
2. Competition is enhanced by a high level of local autonomy which encourages innovation and diversity. . . .
3. Competition is strengthened if local authorities are heavily reliant on local sources of revenue. . . .
This explains why IJC is a bigger issue in the US than in some other countries. We have 50 states and tens of thousands of local governments, each a relatively large amount of autonomy and their own local sources of revenue.
Who are a state's competitors?
Kenyon reviews methods of picking competitors for analysis from the literature:
Other states in the same geographic region.
States that are reliant on the same industries.
States with similar tax structures.
States with similar demographics.
[Hoxby raises some objections to these definitions in the commentary section that are worth reading.]
In the end, Kenyon sugggests that states have different set of competitors depending on the competitive target.
How can one measure a state's competitiveness?
Do you consider business taxes or individual taxes or both?
How do you measure tax level? Highest tax rate? Business taxes per $1000 of personal income? Share of total taxes collected from business? Some measure of tax impact on profitability?
The choice of measure affects a state's ranking compared to other states.
Even when you dispense with measurement difficulties, the larger question is whether the things we think affect business locations decisions are the things that actually affect the decisions. Kenyon suggests:
More research needs to be done on these twin issues: What measures of state tax and other policies actually matter for business location decisions? What do governors and legislators think matters for business location decisions? (p. 18)
That summarizes her discussion of foundational issues; a summary of her discussion of individual theories is in another note section.
Kenyon, D.A. (1997). Theories of interjurisdictional competition. New England Economic Review, March/April, 13-35.
Posted by Chip on June 13, 2004 at 03:54 PM | TrackBack