This paper explores the role and significance of spatial fiscal competition among local governments in the developing world. Although there is now a large literature on local fiscal competition in North America and Western Europe, little is known about the extent and significance of fiscal interaction among local governments in the many developing countries that have undergone fiscal decentralization process over the last decade. This paper, in particular, examines whether jurisdictional competition (in the forms of expenditure externalities, tax competition, and yardstick competition) has been present in Indonesia, a country that was strongly decentralized starting in 2001. Our empirical results strongly suggest the relevance of fiscal competition in the case of Indonesia.
Jorge Martinez-Vazquez, J. Arze and R. Puwanti. “Local Government Fiscal Competition in Developing Countries: The Case of Indonesia,” Urban Public Economics Review, No.8 , 2008, pp.13-45