Budget spillovers in a metropolitan area: typology and empirical evidence

The paper presents a model for measuring spillovers resulting from local expenditure policies. We identify and test for three different types of budget spillovers: (i) benefit spillovers, derived from the production of local public goods, (ii) externalities in crowding, derived from the crowding of facilities by residents in neighbouring jurisdictions, and (iii) externalities derived from expenditure competition effects. Benefit spillovers are accounted for by assuming that the representative resident enjoys the consumption of a local public good both in his community and in the surrounding ones. Externalities in crowding are included by considering that the service outcomes of a locality are influenced by demographic variables of the surrounding localities. Competition externalities occur when the migration of business or residents is sentitive to service differentials. We specify a demand function with interactions among local governments occurring not only among expenditure levels but also from neighbours' demographic variables to own expenditures. The model is tested for six different expenditure categories with a cross-section of data from the municipalities belonging to the metropolitan area of Barcelona. The results are able to identify positive benefit spillovers in spending in Cultural and Sports facilities, and Parks and Streets maintenance. Externalities in crowding appear in spending on Police, Cultural and Sports facilities, Parks and Streets maintenance, and Street cleaning, Water delivery and Sanitation. Spending on Social services seems to be affected by competition externalities, while there is no evidence of spillovers in the case of spending in General Administration.