Are the responsibility and yardstick competition hypotheses mutually consistent?

- Tests the consistency between responsibility and yardstick competition hypotheses.
- Voters' decisions based on inter-jurisdictional comparisons.
- New dataset for all Italian municipalities for the entire duration of ICI.
- Possibility to interpret strategic interactions as proper yardstick competition.
- Rigorous and comprehensive spatial econometric analysis.

This paper tests the consistency between the responsibility and the yardstick competition hypotheses. If no evidence is found that voters reelect mayors comparing their performance with those of neighboring jurisdictions, strategic interactions among municipalities cannot be properly interpreted as yardstick competition. We innovate on the literature by looking at different indicators of popularity and several specifications of inter-jurisdictional comparisons. The dataset includes all Italian municipalities for the entire period when mayors could set the property tax rate, e.g., 1995-2004, considering all interjurisdictional comparisons and relaxing the implicit hypothesis of cross section analysis that observed phenomena are on their steady state equilibrium. The estimates confirm the presence of electoral concerns of the incumbents and a significant spatial correlation of the tax rates, especially among neighboring nonterm limited mayors. Given these results, strategic interactions among Italian municipalities appear consistent with the predictions of yardstick competition theory.