Tax Competition, Nash Equilibria, and Residential Mobility

Wildasin (Journal of Public Economics, 35, 241-249 (1988)) examines and compares the equilibrium policies of governments when they compete in the tax rate and when they compete in the government service. He finds that the two equilibrium outcomes differ, with governments having greater government expenditures when they compete in taxes. Wildasin, however, assumes that residents are immobile. Here I show that, while these two equilibria will still generally differ when residents are mobile, Wildasin′s conclusion that competition in the tax rate results in higher government service levels does not hold when the demand for housing is elastic and government policies are chosen to maximize land rent. When governments maximize the utility of landowning residents, the results are reversed: competition in the tax rate results in higher government service levels when the demand for housing is elastic and lower service levels when the demand is inelastic.