Fiscal federalism and economic performance new evidence from Switzerland

The link between fiscal federalism and economic performance is still ambiguous. Aiming at clarification, we improve on a widespread shortcoming by measuring fiscal federalism not just by one variable but by various institutions that constitute it. To this end, Switzerland provides for a laboratory as its 26 cantons share a common framework, while the extent of fiscal federalism varies between cantons and across time. By exploiting this setting, a two-way fixed-effects approach provides evidence for the expected heterogeneity: The impact of fiscal federalism on economic performance differs conditional on the federal instrument considered. Overall, in-struments of competitive federalism appear to improve economic performance of the cantons, while for cooperative elements the effects are not unambiguously identified.