Abstract
A substantial body of theoretical and empirical evidence demonstrates that interregional competition for factors of production leads to convergence of per capita output. Is there an analogous process that leads to convergence of public sector activity? Skidmore et al. develop a model that is consistent with the macroeconomic growth literature, which predicts convergence in government spending. Using this framework, we test for convergence in government spending using detailed data from Wisconsin for a variety of municipal government expenditure categories over the period 1990–2000. Our empirical investigation provides compelling evidence of convergence in per capita government spending for all the expenditure categories we study.
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Notes
Another strand of the public choice literature emphasizes the potential for bureaucrats to use their position to expand government beyond the level desired by the median voter. See, for example, Niskanen's [1971] model of the budget-maximizing bureaucrat and Brennan and Buchanan's [1980] view of government as leviathan.
Public spending as an input to private output has been modeled in the economic development literature. See for example DeSoto [2000] and Acemoglu [2005].
Unincorporated towns are not included because of the fundamentally different statutory authority between cities/villages and towns.
Thanks to a project funded by the University of Wisconsin-Extension, data on revenues and expenditures for all municipalities in Wisconsin are available over the 1987–2004 period. We evaluate spending over the 1990–2000 period so that we can appropriately match economic and demographic data from the census with our fiscal data. Also recall that in order to minimize spikes in the data we use an average for 1989–1990 and 1999–2000. Unless otherwise noted, references to 1990 fiscal data are in reality an average over 1989–1990 and 2000 fiscal data are an average of 1999–2000.
Given that convergence is generally considered a long-run phenomenon, the 10-year time period analyzed here is a relatively short time frame. Unfortunately, data limitations prevent us from examining the issue over a longer period.
Human capital may also be a determinant of public expenditures on the demand side.
These factors may also to control for factors that may lead to differences across municipalities in the average tax rate.
The 0.77 figure can be derived from equation (4),
which implies that ln g t =constant−0.23ln g t −1+ln g t −1=constant+0.77ln g t −1.
We note that actual rates of convergence are much slower than this estimate suggests because of the offsetting effects of other factors that determine growth in spending.
In fact, the coefficient on initial quality of life spending implies a negative marginal product. This seemingly unrealistic result may be due to other unexplained factors not controlled for in the regression. Also note that the work of Deller and Maher [2005] indicates that in Wisconsin quality of life services may be overprovided in a handful of municipalities. While this finding may not fully explain a negative marginal product, it is not inconsistent with a negative marginal product. A more straightforward explanation could be the “luxury” nature of these services. During times of fiscal stress [boom], these services may be the first to be cut [or expanded].
The “non-conditional” convergence model can be formally expressed as
“Conditional” convergence models expand upon this formulation by addition of control variables such as the structure of the economy and other socioeconomic variables.
Some existing research has examined convergence in the context of spatial econometric techniques [Coughlin et al. 2006; Ertur et al. 2006], which is one approach to account for spatial relationships such as inter-jurisdictional competition. In addition to the traditional spatial econometrics literature methods of Geographically Weighted Regression where coefficient values are allowed to vary over space may provide an avenue to explore the idea of yardstick competition. Alternatively, if one identified a methodology for determining “competitor” communities, it would be possible to explicitly develop a measure of “yardstick” competition. Further examination of convergence in the context of inter-jurisdictional competition is an important avenue for future research.
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Acknowledgements
We thank two anonymous referees and the editor for a number of helpful comments and suggestions. Any remaining errors are the sole responsibility of the authors.
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Skidmore, M., Deller, S. Is Local Government Spending Converging?. Eastern Econ J 34, 41–55 (2008). https://doi.org/10.1057/palgrave.eej.9050019
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DOI: https://doi.org/10.1057/palgrave.eej.9050019