Capital Agglomeration,Strategic Tax Interaction and Vertical Tax Competition

Based on panel data of 269 cities in 26 provinces during the period 2003—2007,this paper constructs spatial econometric models with a three-dimensional error component structure to study vertical tax competition among local governments.Our models also feature an instrumental two-step sys-GMM estimation and a two-way fixed-effect method with a multiple spatial weight matrix.We confirm the existence of significant vertical tax externalities between levels of government.