This paper exploits political and institutional features of Italian local governments to identify the presence of spatial interactions in spending decisions over the period 2001-2011. In particulr, I take advantage of the political cycle to isolate the effect of spending decisions of one municipality on neighbors' municipalities. The results of this analysis point to the presence of strategic interaction between neighboring municipalities and indicate that such a fiscal behaviour is more pronounced during electoral years, that is municipalities are engaged in yardstick competition. Moreover, to isolate any other source of spatial interactions from yardstick competition, I rely on a sample of municipalities experiencing a council dismissal, for which the political process is expected to be less marked - as they are led by a commissioner, who does not have any political concern. In this case, I build a measure of intensity of commissioner to induce variation in the spending decisions, finding, however, no evidence of spatial dependencies. Taken together these results suggest that the observed spatial dependence in spending decisions is unlikely to be driven by spillover effects, rather, it seems to be consent with the yardstick competition hypothesis.
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