This article provides an overview of empirical models of strategic interaction among governments. To clarify the theoretical roots of such studies, the discussion shows how the empirical frameworks fit into two broad categories: spillover models and resource-flow models. Both types of models generate jurisdictional reaction functions, and the empirical task is to estimate such functions. When the estimated reaction-function slope is nonzero, the presence of strategic interaction is confirmed. The second part of the article reviews three econometric issues relevant to this estimation problem.

This article argues that urban spatial expansion results mainly from three powerful forces: a growing population, rising incomes, and falling commuting costs. Urban growth occurring purely in response to these fundamental forces cannot be faulted as socially undesirable, but three market failures may distort their operation, upsetting the allocation of land between agricultural and urban uses and justifying criticism of urban sprawl. These are the failure to account for the benefits of open space, excessive commuting because of a failure to account for the social costs of congestion, and failure to make new development pay for the infrastructure costs it generates. Precise remedies for these market failures are two types of development taxes and congestion tolls levied on commuters. Each of these remedies leads to a reduction in the spatial size of the city.

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This paper uses spatial econometric methods to investigate property-tax competition among local governments. The theoretical model is drawn from the literature on tax competition, in which local jurisdictions choose property-tax rates taking into account the migration of mobile capital in response to tax di®erentials. Using a \spatial lag" econometric model, the paper estimates the reaction function of the representative community, which relates the community's property-tax rate to its own characteristics and to the tax rates in competing communities. A nonzero reaction-function slope indicates the presence of strategic interaction in the choice of tax rates. The estimation uses cross-section data on property taxes and other socioeconomic variables for cities in the Boston metropolitan area. The results, which are presented for two periods before and after imposition of Proposition 2 1 2 (a tax limitation measure), indicate the presence of strategic interaction.

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