Keywords: interactions in local public expenditure, spillover effect, yardstick competition, spatial econometrics, system GMM estimator.
This paper uses a dynamic spatial autoregressive model on a sample of 5564 Italian municipalities over the period 2001-2011. By exploiting the spatial contiguity of municipalities, the analysis points to the existence of a positive and significant effects in neighboring spending decisions on its own municipal expenditure (total, current and investment expenditure). Further analysis indicate that such an effect is not consistent with the yardstick competition hypothesis, as the spatial dependence is not guided by political factors; rather, we found a negative and significant relationship between spatial interaction and the municipality’s size, thus suggesting that spillover effects drive the strategic interactions among local governments. In fact the higher the size the lower the impact in decreasing costs of public good provision due to the neighboring provision.