Federal Competition and Economic Growth
Abstract: We examine how competition between governments affects economic growth. Using data on metropolitan statistical areas in the United States, and exploiting exogenous variation in the country's natural topography to instrument for the number of local governments, we find that the number of local governments significantly and positively aects the growth rate of income per employee over 1969-2006. In particular, doubling the number of county governments is associated with an 18% increase in the income growth rate, which implies an approximate $3900 difference in 2006 income. Decomposing this effect, we find that 60% stems from inter-jurisdictional competition changing the composition of the workforce, while 40% comes from making existing workers more productive.