Political yardstick competition among Italian municipalities on spending decisions

We investigate the presence of political yardstick competition on current spending decisions in a sample of Italian municipalities. We find significant evidence of yardstick competition when we explicitly account for the domestic stability pact (DSP), a fiscal rule introduced to limit the budget deficit of local administrations. First, we estimate a static specification of a spatial panel model, and then we check for the robustness of our results with a dynamic specification. The static analysis shows that municipalities engage in yardstick competition during pre-election years, regardless of whether they are subject to the DSP or not. The dynamic analysis shows that the yardstick hypothesis remains robust only for municipalities not constrained by the DSP.