How tame will Leviathan become in institutional competition? Competition among governments in the provision of public goods

Apolte Thomas

Abstract
This article critically examines the hypothesis of Brennan and Buchanan that competition among governments in the provision of public goods can serve as a substitute for constitutional constraints on governments. Since Leviathan-type governments with free choice of tax instruments will be able to escape competitive pressure by shifting taxes to immobile factors, one could think of a rule of competition which prohibits taxes on immobile factors. Indeed, such a rule leads to a Nash-equilibrium where the tax burden lies on the mobile factor. However, net income of the citizens may or may not increase as a result from such a rule, depending on a number of variables presented in this article. A complete substitution of constitutional constraints by the rule of competition may, depending on the same variables, even decrease net income. Moreover, some potential for increases in net income may be forgone, since capital allocation and the supply of public goods will usually be inefficient in equilibrium. Finally, applying the rule in a real-world environment will be difficult and may even lead to further serious inefficiencies. For these reasons, such a rule will hardly ever be introduced. Hence, competition among governments cannot be viewed as a proper substitute for constitutional constraints. Whoever is afraid of Leviathan should thus not rely on competition among governments (alone).

Keywords
tax competition fiscal competition nash equilibria federation efficiency mobility property models clubs