“Competitive federalism” refers to the existence and desirability of competition among governments and jurisdictions in a federal political system. Competition among governments can be defined as rivalry whereby each government attempts to obtain some scarce benefit or resource (e.g., foreign investment) or to avoid a certain cost (e.g., a large welfare population). Such competition is likely to occur in a federal system characterized by noncentralization, by substantial self-governing authority on the part of the system’s constituent governments (e.g., states or provinces) as well as the national government, and by population mobility between the system’s constituent governments (e.g., many individuals moving from one state to another). Competition is likely to be stifled when a federal system is highly centralized, constituent governments enjoy little power, and population mobility is low.
Generally, there are two types of competition among governments in a federal system: intergovernmental and interjurisdictional.
Intergovernmental competition, called vertical competition by some observers, entails competition among different orders of government having different powers, such as competition between the national government and state governments, competition between state governments and local governments, competition between a county and other local governments within its territory, and competition between general-purpose and special-purpose local governments. A principal cause of intergovernmental competition is forum shopping, namely, the tendency of voters and interest groups to seek redress of grievances by going from one government forum to another—federal, state, and local—seeking the best response. In addition, federal, state, and local officials compete to some extent with each other for voter affections. As James Madison argued in The Federalist No. 46, “If . . . the people should in future become more partial to the federal than State governments, the change can only result from such manifest and irresistible proofs of a better administration, as will overcome all their antecedent propensities.”
Interjurisdictional competition, called horizontal competition by some observers, encompasses competition between governments having comparable powers in a federal system, such as competition among states (i.e., interstate competition) and competition among municipalities (i.e., interlocal competition). A principal cause of interjurisdictional competition is population mobility. That is, people and business firms “vote with their feet” by moving from one state or locality to another, thus putting pressure on state and local governments to compete with one another in order to retain and to attract residents and businesses.
Governments use fiscal tools (e.g., taxes and spending) as well as regulatory powers to compete with each other. A state government might, for example, seek to improve its comparative attractiveness for business investment by reducing certain taxes and improving its transportation infrastructure. The national government might compete with state governments by offering better services or superior protections of individual rights.
An advantage of intergovernmental competition is that it can sustain a sufficient balance of power in a federal system to prevent either the disintegration of the system into its constituent parts or the centralization of the system into monopolistic tyranny while, at the same time, improving responsiveness to citizens. A disadvantage of intergovernmental competition is that it can deteriorate into excessive spending and corruption as national and state officials compete for voter affections.
A common criticism of interjurisdictional competition is that state and local governments waste resources and race to the bottom in seeking to attract residents and businesses. That is, they offer wasteful tax incentives; spend tax money on needless projects; reduce important regulations, such as environmental regulation; and reduce certain types of spending, such as welfare spending, so as to attract certain residents and businesses and repel others, such as poor people. Advantages commonly attributed to interjurisdictional competition include greater fiscal discipline, better efficiency, more innovation, and races to the top as governments seek to attract and retain residents and businesses.
Daphne A. Kenyon and John Kincaid, eds., Competition among States and Local Governments: Efficiency and Equity in American Federalism (Washington, DC: Urban Institute Press, 1991); Charles M. Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy 64:5 (1956): 416-424; Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge: Harvard University Press, 1970); Albert Breton, “Towards a Theory of Competitive Federalism,” European Journal of Political Economy 3:1-2 (1987): 263–329; James M. Buchanan, “Federalism as an Ideal Political Order and an Objective for Constitutional Reform,” Publius: The Journal of Federalism 25:2 (1995): 19–27; Craig Volden, “The Politics of Competitive Federalism: A Race to the Bottom in Welfare Benefits?” American Journal of Political Science 46:2 (2002): 352-363; Viktor J. Vanberg, “Competitive Federalism, Government’s Dual Role and the Power to Tax,” Journal of Institutional Economics 12:4 (December 2016): 825-845.