Interjurisdictional Competition and Economic Growth in U.S. Metropolitan Areas

Oates' (1972) decentralization theorem holds that local governments will do a superior job at providing the efficient quantity of public goods. Brennan and Buchanan (1980) suggest that "the potential for fiscal exploitation varies inversely with the number of competing governmental units in the inclusive territory." (211) Together, these imply that there will be a positive relationship between economic growth and both the degree of decentralization of government and the number of competing government jurisdictions. The previous empirical literature has produced mixed results on those relationships. This paper provides the first examination of that relationship between interjurisdictional competition and local economic growth that utilizes a panel data approach. Unlike most of the previous literature, it examines all U.S. metropolitan areas (nearly 400), not just a subset of the largest ones, so the results are more generalizable to the entire population of U.S. metro areas. Using a fixed effects regression model, the results provide some support for that hypothesis of a positive relationship, yet there are some conflicting findings as well