ABSTRACT
This chapter centers on the interactions and reactions of state and local governments to higher-level governments and to others at the same level. It examines which level in a governmental hierarchy is best suited to provide which public services for its citizens. The chapter investigates the study the impact of one jurisdiction's decisions on its neighbors, as well as the attempts of a higher-level government to control the decisions of lower-level decision-makers. It examines the optimal redistribution policies among governments and the effects of implementing them. Governmental programs are often required by one level of government, but financed by taxes or fees provided by another governmental level. Traditional public finance theory assumes that intergovernmental grants are motivated by criteria of efficiency and equity. The chapter observes two games that decision-makers and voters of several rival jurisdictions play: yardstick competition (the comparison of amenities among jurisdictions) and fiscal mimicry.
