Overlapping Local Government Debt and the Fiscal Common
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© 2014, © The Author(s) 2014. In a complex federalist system, the interactions across levels of government have important fiscal implications. Municipal debt has become increasingly important as local governments turn to tax-backed bonds as a significant source of funds. In a system of local governments that have overlapping borders, fiscal interactions become a factor in issuing debt. In this system, debt acts as a fiscal common resource similar to traditional common-pool resources. Specifically, vertical externalities are created with multiple levels of governments issuing bonds backed by the same tax base. Empirical results show that on average an increase in the total amount of debt issued by subcounty governments increases the true interest cost paid by county governments on tax-backed debt. Furthermore, increasing the number of overlapping governments also increases the interest costs for county debt. These findings show support for analyzing debt capacity as a fiscal common resource and have implications for debt management strategies.
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