: Strategic Interactions among Overlapping Governments: Evidence from School Finance Reforms

• In Event: Tax Competition and Fiscal Externalities

Abstract

We examine the degree of strategic fiscal interactions among sub-state overlapping governments. To identify the causal relationship between the policy choices of overlapping governments, we exploit the plausibly random timing of school finance reforms to examine how exogenous shocks to school district revenues impact the fiscal behavior of overlapping jurisdictions using difference-in-differences (DD) and triple difference (DDD) identification strategies. We begin by developing a simple model of strategic interactions among overlapping governments to motivate empirical work. Our empirical analysis is based on school district revenues and expenditures from the NCES F33 files and detailed data on the revenue and expenditures of overlapping municipalities (e.g. cities, towns, counties) from the Census of Governments from 1986 to 2020. Consistent with the existing school finance literature, we first show that school finance reforms led to large increases in school district revenues and expenditures, particularly among lower income school districts. We then estimate reduced-form DD models that exploit both across- and within-state variation in exogenous shocks to school district revenues and reduced form DDD models that exploit only within-state variation in school district revenue shocks and hence control for any unobserved state specific factors that might otherwise bias our results.

Authors

• William Hoyt, Martin School of Public Administration and Department of Economics, University of Kentucky

• David Schwegman, School of Public Affairs, American University

• Eric Brunner, University of Connecticut