Theories of Interjurisdictional Competition

Associate Professor of Economics, Simmons College. The author would like to thank Caroline Hoxby, Andy Reschovsky, and Bob Tannenwald for their helpful comments on earlier versions , and she is grateful to Lora Slo-mich for her able research assistance on this paper. Theories of Interjurisdictional Competition. .. one of the great strengths of federalism is the opportunity it presents for the development of intergovernmental competition.. .. The national government itself should undertake to strengthen competition among the states. It can do so in prosaic yet effective fashion by acting to improve information and mobility (Dye 1990, pp. 177, 193). Competition among states for specific businesses is commonplace and growing more costly.. .. Congress should stop the use of preferential taxes and subsidies by state and local governments to compete with one another to attract and retain businesses (Burstein and Rolnick 1996, pp. 36, 35). T hese two recent statements by scholars of interjurisdictional competition should give us all pause. One talks of the strengths of competition among states and local governments; the other speaks of the costs. The first proposes that the federal government strengthen interjurisdictional competition; the other argues that the federal government should stop efforts " by state and local governments to compete with one another to attract and retain businesses. " One might ask which statement is right and which is wrong. One might also ask whether each statement has some elements of truth, depending upon the particular context. This paper attempts to provide the reader with a basic understanding of interjurisdictional competition. First, the term is defined and various forms of interjurisdictional competition are distinguished. I then discuss necessary preconditions for interjurisdictional competition. Other questions raised include the following: How does one determine a state or local government's competitors? How can one measure the competitiveness of a state or local government? The bulk of the paper reviews various theories of interjurisdictional competition, focusing on economic theories. When describing the theories, I ask the following questions: 1) What are the author's major assumptions? 2) What type of interjurisdictional competition does the model or