Finite-lived politicians and Yardstick competition
Résumé
The introduction of finite-lived politicians within a life cycle model raises the well-known "last period problem". An opportunistic incumbent, who is serving his/her last term, will not be penalized for introducing higher taxes. In this and other respects, tax competition is often considered as a yardstick. Changes in the tax rate within a given jurisdiction are influenced by the tax rate changes in neighboring jurisdictions. Combining these two notions yields the conclusion that a leviathan politician in office may not be contained if the incumbent in the neighboring jurisdiction is holding office for the last time. In this paper we challenge that conclusion. We show that the efficiency of yardstick competition in restraining opportunistic political behavior depends upon the number of competing jurisdictions and the way in which these jurisdictions are spatially organized.