A theoretical and empirical analysis of efficiency and inefficiency which an intergovernmental competition would intensify in a fiscal decentralized society

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Tiebout hypothesis posits that residential sorting can lead to an efficient provision of local public goods in a decentralized society. By contraries, literatures on tax competition find two types of tax externalities which distort an optima level of local taxes in a fiscal system where different hierarchical governments locally share the same tax base. This analysis empirically investigates the two contrary hypotheses about fiscal decentralization by using Swedish regional data set. Consequently, we can find that in addition to the coexistence of both effects, a dominant vertical tax externality would higher suboptimally local tax rates.