Spatial fiscal interactions among French municipalities within inter-municipal groups

Based on a unique dataset of French municipalities and a large number of bud- getary variables, we estimate the extent of spatial fiscal interaction among the 33,484 French municipalities in 2008 by accounting for inter-municipal cooperation. Using a spatial autoregressive model with inter-municipal group fixed effects, we show that spatial interactions among French municipalities are inflated by correlated effects that affect similarly municipalities that cooperate together. Removing these con- founding effects leads to considerably smaller positive spatial interactions for tax decisions and even negative ones for capital expenditures. In addition, we observe a clear distinction between complementary choices on current budget items and substitutable choices on capital budget items