New article by Maximilian Todtenhaupt
The article "Fiscal competition and public debt" has been published in Journal of Public Economics.
Journal of Public Economics is on level 3 in the ABS Academic Journal Guide.
Janeba, Eckhard, and Maximilian Todtenhaupt: Fiscal competition and public debt, Journal of Public Economics, 2018, 168, 47-61, Online 26.10.2018.
This paper explores the implications of high indebtedness for strategic tax setting when capital markets are integrated. When public borrowing is constrained due to sovereign default or by a binding fiscal rule, a rise in a country's initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that jurisdiction, while the opposite occurs elsewhere.
On net a jurisdiction with higher initial debt becomes a less attractive location. Our analysis is inspired by fiscal responses in severely hit countries after the economic and financial crisis which are consistent with the theoretical predictions. We find a similar pattern on the sub-national level using administrative data from the universe of German municipalities.