Size and Territorial Spillovers in Municipalities' Spending on Infrastructures: Theory and Empirics

We model two municipalities providing infrastructures to their citizens and the benefits of infrastructures spillover from one municipality to the other through two channels: the more the neighbors provide infrastructure service, the less each municipality will spend for the same kind of public service, if it is sufficiently small; furthermore, there are also some public input neighbor's infrastructures (roads, street lighting, sidewalks, bridges, canals etc.) decreasing its own production cost of public and private goods. The model has been tested by using financial and socio-economic data from Provincia Autonoma of Trento. The results show that the relationship between its own infrastructure and neighbors' is significant, positive and decreasing in population size.