In search of yardstick competition: a spatial analysis of Italian municipality property tax setting

This paper uses Italian local government data to test for fiscal interaction arising from yardstick competition. To discriminate yardstick competition from competing theories of strategic interaction, we account for the incentives and constraints generated by the electoral system, in particular for the presence of term limits and the size of the majorities supporting the mayors. Estimation of a local property tax setting equation uncovers positive spatial auto-correlation in local tax rates of jurisdictions where the mayors run for re-election in uncertain contests, while interaction is absent where either mayors face a term limit or are backed by large majorities.