The virtue of narrowing: the fiscal federalism setting

This chapter mainly discusses the empirical work in the domain of local (subcentral) finance involving yardstick competition. It begins with a short section on the systemic novelty introduced by yardstick competition into the theory of fiscal federalism. The central part of the chapter focuses on the empirical arguments developed to probe the presence of yardstick competition and yardstick voting in various data sets. Then, some queries are formulated about the exact nature of what has been established empirically so far. It seems clearly confirmed that some form of yardstick competition or yardstick voting is at work in different settings. That result is important but the findings should not be supposed to validate the game-theoretical analysis or the pure mimicking behavior assumption typically associated with the empirical studies. Alternative approaches are considered toward the end of the chapter.

Accountability, information, and yardstick competition

The chapter follows the logic of the relation between downward accountability, the information asymmetry faced by voters or citizens, and yardstick competition. Assuming that the accountability perspective is adopted, the main question is the information available to citizens. In important policy domains it is difficult to mitigate the information asymmetry faced by citizens in the absence of yardstick comparisons. This offers a role for these comparisons and with them yardstick competition to come to the rescue of accountability. A similar logic inspired the way tournaments and yardstick competition were introduced, in the 1980s, in the fields of labor and industrial economics. The last part of the chapter recalls some characteristics of that work and discusses the way they must be adapted, with some discarded (namely the contractual dimension), when the analysis is transposed from its original habitat to the agency relation between citizens and incumbents.

Introduction

This introductory chapter presents the mechanism of political yardstick competition and provides an overview of the following chapters. The presentation of the mechanism includes indications on its recognition in the 1980s in the context of decentralization and fiscal federalism and comments on the literature that developed since then. Among the comments it is argued in particular that two elements in the contribution of the core research program are in reality disjoint. Only praise is needed about the empirical element, which has exploited in an inventive way the tools of spatial econometrics. However, the theoretical element has been generally developed in a game-theoretic framework dependent on the assumption of a single representative voter. Doing without that framework and assumption is a distinctive feature of the alternative approach adopted in the book. This is necessary above all to increase the plausibility and relevance of yardstick competition, in particular as a latent force constraining policy-making.

Final comments: perverse effects, advice, and arguments

This concluding chapter considers three related matters: perverse effects, advice, and arguments. Perverse effects of yardstick competition are a serious possibility. They may take different forms, but in all cases, they justify some reluctance to derive and formulate recommendations. But, abstaining from giving any advice does not imply policy irrelevance. The uncovering of yardstick competition as a possibly important mechanism should play a role mainly as an argument in political economy debates. This suggestion is in agreement with a methodological position relating three concepts undervalued for a long time in the philosophy of science: models, as imaginary non-linguistic entities; mechanisms, as ingredients both of models and of reality; and arguments, in particular when critical of established views.

Vertical interactions

This chapter considers yardstick competition in the context of multilevel governmental systems. Vertical interactions then arising complicate in various ways the working of yardstick competition. The first section is about the effect of these interactions on horizontal yardstick competition that is, on yardstick competition among governments situated at the same tier. Interactions may also take the form of vertical competition among governments situated at different tiers. The second section considers different forms of vertical competition, with a special focus on the form proposed by Albert Breton, based on a particular interpretation of yardstick competition. The second section also includes a discussion of vertical competition in unitary types of intergovernmental relations—when governments at one tier are entitled to change the rules. The third section is about yardstick competition in the European Union setting.

Two heuristic models

Two heuristic models are presented in this chapter. The first shows how yardstick competition may have an influence on the allocation of government’s efforts, in particular how it may reorient it from transactions with interest categories to broader concerns such as economic growth. Extensions of the model concern the possible influence of yardstick competition on domestic institutions such as checks and balances and its implications for international political relations, in particular international leadership. One effect of yardstick competition is to maintain policy-making within some bounds. What factors determine these bounds? The second model suggests a rough division of these determinants into two categories, related to information and political institutions respectively. The determinants are summarized in a checklist that may be useful in particular for analyzing persistent low economic growth.

A characterization of political yardstick competition

The characterization of yardstick competition elaborated in this chapter and adopted throughout the book starts from a distinctive critical assumption about the agency setting in which it operates. In this electoral agency setting, the principals are the individual members of large heterogeneous electorates or, more generally, large populations of citizens. Individual voters or citizens differ in how they interpret their role and incumbents can treat citizens’ response to their actions as a non-strategic aggregate relation between comparative performance and expected electoral support. The chapter goes on to show that the difficulties associated with this hypothesis are mitigated by the crucial assumption that voter response is not linear but S-shaped—the effects of insignificance, ambiguity, or confusion on the aggregate response tend to dissipate when differences in comparative performance get larger. The possibility is also acknowledged that in real-world settings, depending on circumstances, the mechanism may not work.

The challenge of extending: the international setting

This chapter’s discussion of yardstick competition among national governments is less about substance than about the puzzle raised by its almost complete neglect by researchers. It poses the question why, since there is much circumstantial evidence of the relevance of the mechanism in reality, there is so little work on it in the empirical literature. Admittedly, moving from the propitious setting of fiscal federalism to the relationship among national governments encounters technical difficulties. But it also encounters ideological and sociological obstacles. For instance, the specific situation of the United States with regard to the possible impact of yardstick competition, taken together with the well-deserved worldwide influence of US scholarship, may have something to do in the puzzling lack of attention that is also given to yardstick competition in the context of small open economies or societies such as the European ones.

Yardstick competition and its cousins

The chapter considers some mechanisms that interact with yardstick competition or that might be confused with it. Most attention is given to mobility-based competition and policy learning. Mobility-based competition is discussed mainly with regard to its relation with yardstick competition. For policy learning, the discussion is also about the way it is distinct from yardstick competition. On that matter, two differences are crucial: cross-jurisdiction comparisons are assumed to be made by citizens in the case of yardstick competition but by officials in the case of policy learning; officials are assumed to be concerned with both policies and policy outcomes while citizens are concerned only with policy outcomes—that is, at least as long as outcomes are comparatively satisfactory.