Local Expenditure Interaction in Italian Municipalities: Do Local Council Partnerships Make a Difference?

Abstract This paper investigates interdependence among local councils in Italy in their public spending and distinguishes between possible sources of this interdependence. We find significant positive interaction among neighbouring local councils in regard to both spending at the level of total expenditure and spending on different sub-categories. Attempts to identify the source of this horizontal interaction seem to reject the yardstick competition hypothesis. Addressing the role that local council partnerships may play in internalising fiscal externalities, we suggest that expenditure interaction may be driven by spill-over.