EVIDENCE OF POLITICAL YARDSTICK COMPETITION IN FRANCE USING A TWO‐REGIME SPATIAL DURBIN MODEL WITH FIXED EFFECTS*

ABSTRACT This research proposes a two-regime spatial Durbin model with spatial and time-period fixed effects to test for political yardstick competition and exclude any other explanation that might produce spatial interaction effects among the dependent variable, the independent variables, or the error term. The study also derives the maximum likelihood estimator and variance–covariance matrix of the parameters of this model. Data pertaining to welfare spending by 93 departments in France during 1992–2000 provide significant empirical evidence in support of political yardstick competition. Departments governed by a small political majority mimic neighboring expenditures on welfare to a greater extent than do departments governed by a large political majority.