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, instruments of competitive federalism appear to improve economic performance of the cantons, while for cooperative elements the effects are not unambiguously identified. •Fiscal federalism needs to be captured by its different institutions.•Competitive fiscal federalism rather improves economic performance.•For cooperative institutions the effects are not unambiguously identified.•Competitive and cooperative institutions do not interfere with each other.