Does Tax Competition Raise Voter Welfare?∗

Economists who believe that government is essentially benevolent tend to regard inter-governmental competition as a source of negative externalities that lower welfare. In contrast the public choice perspective, particularly that motivated by the Leviathan model, sees such competition as potentially beneficial. This paper considers a world consisting of politicians of both kinds – self-interested and welfare maximizing. However, imperfect information prevents identification of the latter. We model the political equilibrium of the model and then examine the consequences of introducing competition for mobile resources or yardstick competition. In both cases there is a trade-off between effects on politician discipline and selection. Contrary to the existing view, we show that competition is most likely to be welfare improving for voters when it is more likely that politicians are benevolent and bad for welfare when it is most likely that politicians are of the rent seeking type. ∗We are grateful to a number of seminar participants for helpful comments.