The problem of the fiscal common-pool: is there an overlap effect on state and local debt?

Abstract

PurposeThe objective of the study is to determine if an over-borrowing bias emerges when the state fiscal base is shared by multiple general-purpose and special-purpose jurisdictions serving different groups of citizens.Design/methodology/approachThis study uses panel data from all 50 states in the US from 1997 to 2007 to estimate models of total debt levels of state governments and total debt levels of all local governments aggregated at the state level. For comparison, it also estimates total debt levels of state and local governments taken together for the same years.FindingsThis study finds that jurisdictional overlap will increase state government debt, local government debt, as well as combined state and local government debt.Originality/valueThe finding from the study suggests that the fiscal common-pool model provides a more accurate analysis and more appropriate understanding of the institutional composition at the state and local public sector, especially for the vertical dimension of the local public sector where there are more specialized and overlapping jurisdictions.