Interjurisdictional Competition and Local Public Finance: Assessing the Modifying Effects of Institutional Incentives and Fiscal Constraints

Analysts have sought for years to explain the variations in municipal expenditures across communities, with only modest success. However, recent efforts combining core propositions from the 'Leviathan' and 'municipal reform' frameworks show considerable promise. This paper contributes to this emerging literature by developing and testing a framework using more complex measures of municipal structure. It is proposed that the effect of interjurisdictional competition on city spending is conditioned by the incentives for spending created by the city's municipal structure and the limitations imposed by the community's fiscal capacity. The analysis of expenditure patterns in 263 Michigan cities provides clear support for the proposition of contingent effects of fiscal capacity. The evidence for municipal structure is more modest, but supportive of the predicted effects. It is thought that these findings confirm the value of this approach to studying this topic and offer a direction for others to follow.