Yardstick Competition: Which Neighbours Matter?

This paper aims at testing the existence of yardstick competition by estimating a fully specified votefunction on a panel data set of 104 French local governments from 1989 to 2001. When comparing the performance of their incumbent to the one of their "neighbours", voters might consider their close geographical neighbours but also the nearby cities that are similar according to some socio-economic characteristics such as population size. The estimation results show that voters sanction their incumbent if their own local housing tax is high. Moreover, we find that voters reward their incumbent when neighbouring cities that are similar in terms of demographic characteristics have high local taxes.