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Tax Competition with Intermunicipal Cooperation

We study local tax competition when municipalities can voluntarily cooperate with neighboring jurisdictions. In France, the strongest form of cooperation among municipalities occurs by forming an “establishment for inter-municipal cooperation” with tax power (EIMC). Joining an EIMC amounts to agreeing to finance joint projects, while still allowing the municipality to maintain taxing power. We study how tax competition and interjurisdictional policy interdependence differ between competing municipalities within the same EIMC and competing municipalities outside of the cooperative unit. We apply the estimation strategy of Kelejian and Piras (2014) to resolve the endogeneity of the decision to cooperate with other municipalities. To do this, we instrument for current day cooperation with the historical participation decisions in unrelated cooperative agreements forty years earlier. When studying the effect of cooperation on taxes, we find that strategic interactions among peer members of the same EIMC is less intense than strategic interactions with municipalities outside of the cooperative unit. The results are consistent with inter-municipal cooperative units reducing competitive forces with respect to municipal tax rates.